If you need to refinance your mortgage, it can be harder than you think—especially if you’ve got bad credit. Even with an average credit score, you might be tempted to believe that refinancing isn’t an option for lowering your monthly mortgage payment. However, a low credit score doesn’t mean you’ll be automatically denied.
Immediately below, we’ll share how to refinance a mortgage with bad credit. There are several choices available for refinancing, and we’ll talk about which one may fit your situation best.
You might want to refinance a mortgage for many reasons. First, there’s the opportunity to secure a lower interest rate. Other reasons include converting from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, accessing home equity to raise money for a financial emergency, and consolidating debt. Additionally, you may want to finance a big purchase or shorten the term of the mortgage.
It's an important decision as to whether you should refinance, since doing so requires a title search, application fees, and an appraisal. If you’re considering refinancing your mortgage, we recommend speaking with a Mares Mortgage team member who can address any questions you might have.
It’s essential to understand the basics before choosing to refinance your mortgage. Many homeowners are shocked at the sheer amount of paperwork many lenders require to get approved. Moreover, they aren’t aware that other refinance options don’t demand near as much.
With that in mind, refinancing is the process wherein a new loan replaces an existing mortgage. Many of the reasons to do so are listed above. Whatever your goal happens to be, the process when applying to refinance your mortgage is similar to the moment you applied for your first loan.
You’ll have to do your research, get your financial documents in order, and apply to refinance your mortgage before receiving approval.
Related: Recast a Mortgage: A Complete Guide
Are you confused about how refinancing works? One of our team members here at Mares Mortgage can help clarify everything for you.
Refinancing your mortgage requires doing some research. You need to know the requirements of the various programs that are available. Your first option is to see if your current lender will work with you. If they won’t, it’s time to look around and consider alternatives. For example, you may wish to look at several other lenders who provide refinancing options for those with bad credit. This is an area in which Mares Mortgage can help.
It’s important to note that you may not be able to get a loan by yourself when you have bad credit. In that case, a financial institution might suggest that you find a cosigner. The interest rate quoted will be based on whoever has the lowest credit score. However, obtaining a cosigner might be the difference between securing approval and denial.
There are some refinancing options available to military veterans. These include an interest rate reduction refinance loan (IRRRL) and a cash-out refinance loan.
If you want to make your monthly mortgage payments smaller or more stable, an interest rate reduction refinance loan (IRRRL) might be the right option. For this choice, you must have an existing loan backed by the U.S. Department of Veterans Affairs (VA).
This option allows veterans to borrow up to 90% of their home’s value. Essentially, the VA Cash-Out Refinance loan allows you to replace the loan you already have with one that has different terms. The same VA guidelines apply in terms of credit, and the cash out can be used to prop up a declining savings account, stockpile cash, or pay off debt.
Suppose you’re a veteran with bad credit and little or no equity, and you didn’t use your VA eligibility to buy a house. In that case, you can use it to pay off any conventional loan or even an existing FHA loan. You aren’t required to have a minimum credit score to secure this refinancing.
FHA loans are usually restricted to those who intend to use the house they buy as their primary residence. That means FHA loans can’t be used to finance a rental home, a vacation home, an investment property, or a second home.
If your house becomes an investment property, the interest rates could drop, and you may want a better deal through refinancing.
You can receive approval for an FHA streamline refinance if you have a loan backed by the Federal Housing Administration. You must have had your original home loan for 210 days before applying. Also, you can’t be overdue on payments by more than 30 days within the last year.
Talk to a Mares Mortgage professional for more details.
With this option, you can take out more than you currently owe and keep the difference—but only within the FHA loan limits for your region.
If your credit score is below the 620-point threshold, an FHA rate and term refinance could be a good option. Even with a score as low as 580, you may still qualify.
There are a few options to consider, even if your foreclosure or bankruptcy was just completed. Alternative lenders, also known as “non-prime lenders,” don’t follow the same guidelines as government-backed programs.
Many of these lenders offer products through mortgage banks or brokers, but not all are available in every state.
Related: How to Get a Home Improvement Loan
You might be able to improve your credit score quickly by:
Secured credit cards help you build credit, though they’re not a guaranteed fix. Some users see improvements within six months.
Keep credit utilization low—this is the second-highest factor in your credit score according to both FICO and Vantage.
Paying on time consistently is one of the fastest ways to improve your credit score.
Delinquent accounts can drag your score down. Get current to stop further damage.
Too many new accounts = hard inquiries + reduced average account age, which can hurt your score.
If you share accounts with someone who has bad credit, lenders may penalize you for the connection. Remove linked accounts to protect your score.
It varies. A single late payment can be easier to recover from than multiple defaults. Negative marks usually stop affecting your score after seven years, but following the steps above can speed things up.
Don’t let bad credit stop you from exploring refinancing options. Government-backed loans like VA and FHA provide great paths to refinancing.
Just be cautious: evaluate all the costs and fine print before committing to any new loan. And when in doubt, contact Mares Mortgage for expert guidance on making the best financial decision for your situation.
Related: How to Get a Veteran Home Loan
Thinking about refinancing? Talk to one of our team members at Mares Mortgage and let us walk you through your options.
