How to Refinance with Bad Credit (Updated 2018)

BY Ally Abernathy

what credit score is needed to buy a house

Are you looking to reduce your mortgage payment but think you can’t refinance with bad credit?

If that’s a yes, then don’t put the idea on the back burner just yet.

There are ways you can refinance your mortgage with a bad credit rating.

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Refinance with Bad Credit Options

You have several options to refinance your home loan. What exactly you’re trying to accomplish will help you decide on which refinance program is best for you. There are refinance programs that will get you a lower rate and payment.

There are other programs that will allow you to get cash using the equity you have in your home. Here are some of the refinance options you have with less than perfect credit scores.

FHA Streamline Refinance

If you have an FHA loan then you’re in luck. You may qualify for an FHA streamline refinance. This FHA Refinancing Program is suitable for aspiring homeowners with a poor credit rating.

FHA loans allow you to refinance without an appraisal, a credit check (in some cases) or having to show income documentation. You’re able to lower your monthly payment and get a lower interest rate.

However, you will have to meet some criteria to qualify. While some lenders require a 620 FICO score, other mortgage lenders may allow for a lower credit rating or not perform a credit check at all.

  • Mortgage must be current
  • No late payments over the past 12 months
  • No appraisal is required
  • Lender must be FHA approved
  • Must have owned the home for at least 6 months

Home Equity and HELOC Loans

A home equity loan uses the equity in your home as collateral for a second mortgage on your home. HELOC stands for home equity line of credit which works like a credit card. Many people choose these types of loans as an alternative to a debt consolidation personal loan.

Home equity loans with bad credit are possible. However, mortgage lenders are more resistant because they will be a second lean holder on the mortgage. If you default on the loan, the first lender gets repaid first, the second being holder gets whats left. Without good credit home equity loans are difficult to get approved for.

If you have a poor credit rating then a cash-out refinance is easier to qualify for. This is because the new lender refinances your entire mortgage loan and provides cash up to a 80% loan-to-value ratio. The lender is now the first lien holder, and the loan is less risky.

RATE SEACH: Check home equity and cash-out refinance rates

HARP 2.0 and HARP 3.0

Home Affordable Refinance Program was created by President Obama, also known as HARP. If you have a conventional mortgage that pre dates May 31st, 2009 then you could qualify to refinance with bad credit.

Your mortgage must be from Fannie Mac or Freddie Mac to be eligible. This is a great option for anyone that wants to get a lower interest rate or is upside down on their mortgage.

The best part is that you could qualify for a HARP 2 loan with poor credit. Some lenders require a minimum 620 credit score, while others may be able to go even lower than that.

You cannot have more than one late payment in the past 12 months, and no late payments in the last 6 months to qualify. This is a great option for people with a conventional loan to refinance with bad credit scores.

HARP Eligibility

  • Mortgage owned by Fannie Mae or Freddie Mac
  • Closed on your mortgage before June 1, 2009
  • You haven’t used HARP in the past
  • Must have a conventional loan, Government loans do not qualify

HARP is expected to expire September 2017 so you need to hurry.

HARP Requirements

  1. No missed any mortgage payments in the past six months
  2. No more than a single late payment in the past 12 months
  3. 620 or higher FICO score
  4. Must be employed with verifiable income
  5. Refinance must produce a financial gain for the borrower (Refi must save you money)

Check Your Local Credit Union

Credit Unions are more relationship focused than a big bank, or online lender. If you’re a member of a credit union and have a good relationship with them then you should speak to them about refinancing your loan. They are more likely to overlook a poor credit score to help a long-standing customer.

Refinancing Auto Loans

If you have a car loan with a high interest rate you could still qualify to refinance. Even with poor credit there are refinance loans that may be able to lower your rate and monthly payment. Bad credit auto loans come with very high rates, as high as 20%-25% in some cases.

Look into refinancing your car loan online. Nerd Wallet has a tool to help you find refinancing lenders that work with low FICO scores.

How to Qualify

First, you will need a qualifying reason such as lowering your monthly payments, switching from an adjustable rate mortgage and into a fixed-rate loan (among other qualifying reasons) to refinance. Additionally, you have to be up to date on your current mortgage payments.

You cannot have more than one 30 day late payments in the past 12 months to qualify. A streamline refinance saves FHA borrowers an average of $180 per month.

There are streamline refinancing options for other Government loans as well. VA, USDA, and 203k loans. They work just like the FHA streamline refinance.

Finding Bad Credit Refinance Lenders

Finding a bad credit lender that is able to work with people with a bad credit rating is the first step to refinancing. Different lenders serve different sectors of the mortgage industry; some of them base their focus on offering loans to individuals with credit issues while others serve exclusively those with good credit.

Obtain your credit score and get in touch with up to 5 lenders and see the kind of terms they offer. Shopping multiple lenders can help you get the best refinance rate.

Be very, very careful when shopping for a lender as some of them can take advantage of you. You should run a background check on your lender with the Better Business Bureau to prevent scams.

Note: Avoid shopping around for too long, the typical shopping period is 30 to 45 days. Multiple credit inquiries for a mortgage will count as a single inquiry for 30 days.

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Improve Your Credit Score Before Applying to Refinance Your Home

refinance your mortgage with bad credit

It’s important that you review your report in order to identify what’s hurting your credit. Once you pinpoint what’s dragging your credit score down, you can take steps to fix the bad credit issue(s) that you identified during the review.

There are two ways to do that: the first way involves correcting errors in your credit report and improving your credit record. If you have negative items on your report, you can dispute them with the Credit Bureaus.

Get a copy of your credit report from any of the three major credit reporting agencies. TransUnion, Equifax and Experian. Once you have the reports check them for any errors.

Once you know all the negative items on your report you can contact each credit bureau and dispute the accuracy of the item. The creditor has 30 days to verify the account or the credit bureau has to remove it by law.

Things to do to raise your credit score before refinancing a loan

  • Don’t make any late payments
  • Keep your credit card balances as low as possible
  • Do not apply for new credit accounts
  • Dispute negative items on your report

Make the rest of your application attractive

Bad credit history alone won’t sink your refinance application. Lenders will also be looking at the rest of your loan packet when making a final decision on your refinance loan.

Make sure that rest of your loan application is in order can help to offset what your credit history is lacking.

Be ready with your income statements, bank statements, and tax forms. Also, show stability by keeping your debts to a minimum and having a cash reserve in the bank. A low debt-to-income ratio is another compensating factor for poor credit.

In short, do everything within your power to make your overall loan application more appealing to the lender.

The Bottom Line…

It’s possible to refinance with bad credit, so if you want to lower your mortgage payment but have bad credit you could be in luck.

Review your credit history and try to be responsible with your spending. Look into an FHA streamline refinance or the HARP program.

Home equity and HELOC loans are tough to qualify for, if you have low credit scores cash-out refinancing is a more viable option.

If your application is declined, don’t panic. Apply with other lenders, just because one lender denies you doesn’t mean they all will.

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Ally Abernathy

Ally Abernathy is a contributor and editor for The Lenders Network. Ally has 10 years of experience in the mortgage and real estate industries. She has written many articles covers home loans and giving real estate advice. She graduated from Southern Methodist University with a Bachelors degree in Finance. Ally lives in Dallas, Texas with her daughter, Ella.