Can You Refinance Your Home With Bad Credit?

Couple working on refinance paperwork at home
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As a homeowner, refinancing your mortgage when you have a good credit score—especially one that’s better than when you originally applied for the loan—is an easy decision. It likely means a lower interest rate, a lower monthly payment, and, most importantly, less paid over the life of the loan.

But what if your credit isn’t so great? What if it’s actually lower than it was when you first bought the property?

Fortunately, a less-than-perfect credit score doesn’t preclude you from refinancing your mortgage loan. And with rates recently hitting their lowest point they’ve been in some time, it might be something you want to consider—great score or not.

Refinance Your Home with Bad Credit: What to Know First

The main thing to keep in mind when refinancing with not-so-great credit is that you’ll need to prove your trustworthiness as a borrower in a different way—one that doesn’t involve, or at least heavily rely on, your credit score.

This might mean choosing a lender who doesn’t use credit scores to qualify its applicants (SoFi, for example, uses employment history, monthly cash flow, and pay stubs rather than your credit score for its “FICO-free” loans.) It also might mean bringing in another borrower who has a strong credit history, offering up alternative credit data like proof of past utility bill payments, monthly memberships, and more.

You might also want to consider a lender that uses the UltraFICO score, which bases your credit core on positive financial behavior—things like regularly putting cash into savings, maintaining healthy bank balances, etc.

Tips for Refinancing with a Low Credit Score

If there’s no immediate need to refinance, you may want to consider improving your credit score before applying for your refinance. This will usually qualify you for a lower interest rate and mean fewer costs over the life of your new loan.

To do this, start paying down your debts, starting with the highest-interest ones first. Settle any collections in your name, and pull all three of your credit reports. If there’s an error on any of them, alert the reporting agency and ask for a correction. You should also avoid opening any new lines of credit or taking out a new loan or credit card if a refinance is on your radar.

Here are some other strategies to refinance your home with bad credit:

Opt for a Government-Backed Refinance

The government offers refinancing programs through the Federal Housing Administration (FHA), the Department of Agriculture (USDA), the Department of Housing and Urban Development (HUD), and the Department of Veterans Affairs (VA). All have less stringent qualifying standards (not to mention lower costs) than private lenders, and financial institutions offer. Many even have programs specifically for borrowers with low or poor credit scores (like HUD’s Home Affordable Refinance Program or FHA’s Streamline Refinance, for example).

Choose a Lender That Specializes in Low Credit Borrowers or Manually Underwritten Loans

You can also look to alternative mortgage lenders, like SoFI (mentioned above), New American Funding, or Vylla. These specialize in providing loans and refinancing options to borrowers with less-than-stellar credit scores.

Enlist a Co-Signer

Does your spouse, roommate, sister, or dad have a top-notch credit score? Adding them as a loan co-signer may help your case. Make sure you ask your loan officer first, though. While some lenders will average the scores of co-signers, others will take the lowest score on the application instead (in which case, even a co-signer with a perfect score can’t help you.)

Remove a Co-Signer

You might also want to consider removing a co-signer from the mix if your spouse, roommate or partner has worse credit than you. This could bring down your loan file, making it harder to qualify for a refinance (as well as a decent interest rate).

Consult a Mortgage Broker

If you’ve got a particularly complicated credit profile or are self-employed, a mortgage broker may be able to help you find a suitable option for your refinancing needs. They have access to dozens of lenders and loan options, and they’re usually able to secure lower rates thanks to their industry connections. Make sure to ask about their fees before moving forward with their services.

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