How to refinance a mortgage with bad credit

Sometimes our situations change, and your old mortgage may no longer be working for you. In cases like this, it might be time to refinance.

A rate-and-term refinance allows you to switch up your interest rate and/or your loan term length, which can help you save money and free up cash flow. A cash-out refinance allows you to tap into your home equity to borrow money, possibly earning better terms on your mortgage too. During low-interest-rate environments, it may be even easier to achieve these two goals.  ‍

Most lenders require a good FICO score to refinance your loan, making it difficult for many homeowners to refinance with bad credit. There are ways you can work around this barrier, however — we’ll cover your options for a low credit refinance in this article.

9 ways to refinance a mortgage with bad credit

Non-occupying co-signer

If you have someone you love and trust with better credit than you, one option is to ask them to be a co-signer on your loan. This may be enough of an incentive for a lender to approve your loan application because if you default on the loan, they can pursue your co-signer for repayment. Of course, this means you’ll need to ensure you do make those payments so that you don’t burn a bridge with someone important in your life.

FHA streamline refinance

The FHA streamline refinance is a program designed to help homeowners with existing FHA-insured mortgages lower their rates and monthly payments without undergoing any credit check at all.

To qualify, borrowers must have a solid payment history, with no late payments within the last six months and no more than one late payment in the past 12 months. Unfortunately, the refinance does not allow homeowners to receive cash back at closing.

FHA cash-out refinance

Unlike the FHA streamline refinance, homeowners with either an FHA-insured mortgage or a conventional loan can apply for an FHA cash-out refinance. The refinance allows homeowners to borrow up to 97.75% of their home value.

Funds can be used to accomplish various financial goals like debt consolidation or home improvements. To qualify, you'll need sufficient equity, a maximum debt-to-income ratio (DTI) of 43%, and a credit score above 580.

Learn more about the FHA streamline refinance or cash-out refinance program.

VA streamline refinance

The VA streamline refinance, also known as the VA interest rate reduction refinance loan (IRRRL), helps veterans and active-duty service members with a VA-backed mortgage reduce their mortgage rates and lower their monthly payments. No credit check or home appraisal is required. However, homeowners can't withdraw funds from this refinance.

VA cash-out refinance

Veterans and active-duty service members can access cash through a VA cash-out refinance, which allows homeowners to borrow up to 100% of their home's equity. While there is no minimum credit score requirement, the better your credit score, the better the terms given. You'll also need a DTI of less than 41%, sufficient income, and occupying the residence to qualify.

VA cash-out refinances can be used to refinance either an existing VA loan or a conventional mortgage.

Learn more about the VA streamline refinance or cash-out refinance program.

USDA streamline refinance

The USDA streamlined assist refinance program helps homeowners with existing USDA Rural Development loans reduce their interest rates and monthly mortgage payments without undergoing a full appraisal or providing extensive documentation. Homeowners can’t receive any cash back at closing, except for minor adjustments, such as refunds for prepaid items like taxes and insurance.

To qualify, you’ll need an existing USDA loan mortgage and no late payments in the last 12 months—although some lenders may offer flexibility under certain circumstances.

Fannie Mae’s RefiNow

The RefiNow program makes it easier for low- to moderate-income homeowners to reduce their mortgage payments and access better loan terms. The program mainly benefits borrowers who may have difficulty qualifying for traditional refinancing options due to credit challenges or higher debt levels.

To qualify, homeowners need a DTI of 65% or lower, no missed payments in the last six months, and no more than one missed payment in the past 12 months.

Freddie Mac’s Refi Possible

Freddie Mac’s Refi Possible program also lowers qualification barriers for low- to moderate-income homeowners. Through the program, borrowers can secure better loan terms and up to $250 in cash.

No credit score requirement exists, but the borrower must make less than or equal to 100% of the area median income (AMI) to qualify. Additionally, they should have had no missed mortgage payments in the last six months and no more than one missed payment in the past 12 months.

Work with your lender

If you’re facing financial uncertainty, it’s worth talking to your mortgage lender. Many are open to working with homeowners—especially if you have strong credit or plenty of equity—to make payments more manageable. If refinancing isn’t possible, they might suggest a loan modification, which could lower your interest rate or extend your loan term so your monthly payment better fits your budget and helps you stay in your home.

Alternatives ways to tap into equity with bad credit

If your main goal is to tap into your home’s equity, there may be better options than a cash-out refinance—especially if you have low credit.

Home equity loan

If you don’t want to replace your entire mortgage, another option to borrow funds is a home equity loan. It may still be challenging to find a lender that accepts bad credit, but not impossible. This can be a good option to finance a large purchase or pay off more of your mortgage, especially if you’re already paying lower rates on your current mortgage than on any potential bad credit refinance loans.

Credit score aside, you’ll need 15% to 20% equity, a maximum DTI of 43%, and sufficient income to qualify.

Home equity investment

If you’re looking to tap equity and you don’t want to add to your monthly debt payments, a home equity investment (HEI) may be a good solution. Your credit score may still be considered, but HEI providers may be more willing to work with you than traditional lenders if you have bad credit. You can qualify for an HEI with a credit score as low as 500 if you meet other requirements, like sufficient equity. There are no DTI or income requirements.

An HEI provides a lump sum of cash in exchange for a share of your home’s future appreciation. You can use the funds for any purpose, including paying off your mortgage. There are no monthly payments over a flexible 30-year term.

There are no DTI or income requirements.

You can prequalify for an HEI with no impact on your credit score.

Reverse mortgage

If you’re at least 62 years old, you may be able to take out a reverse mortgage if you need to borrow money. You can access cash via a large lump sum, revolving credit line, or monthly payments made to you. You’ll be required to pay off the remainder of your first mortgage with your loan proceeds. Reverse mortgages allow you to live in your home indefinitely without having to make any payments as long as you meet ongoing requirements.

You’ll need sufficient equity and enough income to cover ongoing home maintenance and property taxes to qualify.

Frequently asked questions

Can I refinance with bad or low credit?

Yes, but it may be more challenging. Some lenders work with borrowers who have lower scores, though you might face higher interest rates or stricter requirements. Having strong home equity or a solid payment history can help your case. Also, exploring all refinance options can help you identify what opportunities are available to you.

How do my debt-to-income ratio and home equity affect my chances?

Both play a big role in whether you can refinance—especially with low credit. A lower DTI tells lenders you have enough breathing room in your budget to handle the new mortgage payment. The more equity you have, the less risky you look to a lender, since they know the property is worth more than you owe. High equity can sometimes offset a weaker credit score and even help you qualify for better terms.

Can a non-occupying co-signer help me qualify?

Yes. A co-signer with stronger credit and income can boost your application and help you qualify for better terms. Just remember—they share responsibility for the loan.

Should I improve my credit before applying—and how?

If you can, improve your credit score first to get better terms. Continue to make on-time payments, pay down credit card balances, and check for errors on your credit report. Even a small score boost can make a difference.

Can I refinance without meeting the 20% equity benchmark?

Yes—programs like FHA loans or VA refinances may allow less equity. You might have to pay for mortgage insurance or accept a higher rate, but it’s still doable.

How long do I need to wait since my last refinance or mortgage origination?

Many lenders have a waiting period, often between six months and one year, after refinancing your mortgage. This varies by loan type, so check your current mortgage terms before applying.

Final thoughts

Refinancing your home with a bad credit score can be a challenging tough. If you’ve calculated your loan costs and you’re confident that you can afford them, taking out a bad credit refinance can be a viable option to borrow money or get better repayment terms. Most experts also recommend refinancing only if you plan on staying in your home for a while so you can recoup enough equity to cover any closing costs.  

If you’re not sure whether a bad credit refinance is in your best interest or if you want a second opinion, try reaching out to a fee-only certified financial advisor who can guide you to the right approach. If you can’t afford a financial advisor, seek out a credit counselor from a reputable non-profit counseling organization who can help.