Can I Refinance With Bad Credit?

It might take a bit more work, but it's worth the effort

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If you're not happy with your mortgage, you generally don't have to stick with it. Refinancing can help lower your monthly payments or save you money on financing costs. But if your credit isn't the best, you might be wondering whether it's even worth it.

"This is an exciting time to refinance, and most people will benefit if they’re seeking to reduce their payment, pay off debt, make home improvements, or even fund an emergency fund," Diana Rice-Wilkerson, a senior loan officer with the Fairway Independent Mortgage Corp., told The Balance by email. And having a less-than-perfect credit score should not prevent exploring your refinancing goals."

Key Takeaways

  • You can still explore your options for refinancing, no matter what your credit score is.
  • A lower credit score may mean that you need more equity in your home or that you won't qualify for the absolute best rate.
  • There is a lot you can quickly do to improve your chances of refinancing success.

How Credit Score Impacts Refinancing

Your credit score can affect the rates a lender might offer you on a mortgage refinance. FICO scores below 670 or a VantageScore lower than 661 are considered less advantageous for borrowing than higher credit scores.

But your score can have an impact on other aspects of some loan types, too—mainly, the amount of debt you can secure and how much equity you need to have built up in the home before you refinance.

For example, having a lower credit score might mean you'll also need a lower debt-to-income (DTI) ratio or more equity in your home in order to refinance a conventional mortgage.

Preparing To Refinance With Bad Credit

Building credit is generally a long-term project and can take many years. But that doesn't mean you can't take steps to help your credit as much as possible before you apply to refinance. In some cases, you may see an instant increase. Here's what to do:

Reach Out to a Reputable Lender Early

"The first step is to seek the advice of a lender to help determine if you’re eligible to refinance, as 'bad credit' does not necessarily mean 'unacceptable credit.' For example, some folks have lower credit scores due to medical debt, bankruptcy, identity theft, or the repossession of a vehicle that was a 'lemon,' " Rice-Wilkerson said. "We can oftentimes work around these situations."

Check Your Credit Report and Credit Score

Before you apply for any credit, it's always a good idea to check your credit reports. It's not uncommon to find errors on them, some of which can even hurt your credit score.

By finding any credit report mistakes first, before a lender you're applying with does, you can take steps to fix the errors so you're not being unfairly penalized.

Pay Down Existing Debt

If you're able, one thing you can do to help your credit score almost immediately is to pay down any debt you have, especially credit card debt. A full 30% of your credit score is made up of the amount of money you owe, so reducing this amount can help.

Get Credit for Rent and Utilities

Your credit score doesn't normally take into account things that you might be really good at managing, such as your bill payments and your bank account. That represents a lost opportunity for building credit. But nowadays, there are programs such as Experian Boost and UltraFICO that do allow you to add in these accounts, which can potentially help your credit score.

Ask Your Credit Card Issuers for Higher Limits

Along with the amount of money you owe, one thing that's really important in this category is how much you owe relative to your limit; in other words, how close you are to maxing out your credit cards.

This is known as your credit utilization rate, and by increasing your credit card limits, it looks like you're borrowing a smaller amount of the credit you have available to you. Just remember not to spend up to that new limit again, or you'll be back where you started, except with more debt.

Get Help From a Certified Credit Counselor

If you're having trouble with your finances and you're not really sure where to start, talking to a credit counselor certified through the National Foundation for Credit Counseling can help. In many cases, the help is free.

How To Refinance Your Mortgage

If you have bad credit, refinancing your mortgage will work much the same as for anyone else, but with one exception: Shopping around for the best deal is even more important. Here's how to do it.

  1. Shop for Rates

    "Shop around and talk to several loan officers. Just because someone is trying to sell you a mortgage doesn’t mean it’s worth buying," Rice-Wilkerson said. "Find a loan officer you can trust, one who works with applicants such as yourself, and take it step-by-step." Your state housing authority may also be a good place to check for lenders that can help.

  2. Choose a Lender and Complete Your Application

    Once you've found a lender with whom you're comfortable and who can offer the best rates, you can put in a full refinance application.

    Because your credit score is weaker, your lender may require you to provide more documents or answer certain questions, so stay in close touch with them.

  3. Start Payments on Your New Mortgage

    Once you're approved, you'll go to closing to sign the final documents, just like when you first took out your mortgage. Your new lender will pay off your old lender, and you'll begin making payments on your new loan. Remember to sign up for autopay so you don't have to worry about remembering to make your payments; this will help you build credit.

The Bottom Line

It's true that you may not get the best rates on a mortgage refinance if you don't have stellar credit. However, that doesn't mean it's not worth applying, because you still might get a better rate or a lower payment than you have now. If anything, it will be easier to make cheaper payments, so you'll be more likely to continue building credit over time.

Frequently Asked Questions (FAQs)

How often can you refinance your home?

There aren't any legal limits on how often you can refinance your home. But there are program limits for some types of loans, such as Federal Housing Administration (FHA) and Veterans Affairs (VA) loans, which require you to wait at least six months before you can refinance again.

What are today’s mortgage refinance rates?

As of time of publication, the interest rate on a 30-year fixed refinance mortgage was 5.72%. Rates are constantly changing, though, and to get the most up-to-date information, check current mortgage refinance rates.

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Article Sources

  1. Consumer Financial Protection Bureau. “Seven Factors That Determine Your Mortgage Interest Rate.”

  2. Experian. “What Is a Good Credit Score?

  3. Fannie Mae. “Eligibility Matrix,” Page 4

  4. Consumer Financial Protection Bureau. “Buying a Home? The First Step Is To Check Your Credit.”

  5. MyFICO. “What's in My FICO Scores?

  6. Experian. “Only Experian Can Raise Your FICO Score Instantly.”

  7. FICO. “UltraFICO.”

  8. MyFICO. “What Is Amounts Owed?

  9. Federal Reserve Board. “A Consumer’s Guide to Mortgage Refinancings.”

  10. Ally. “How Often Can You Refinance Your Home?