How to refinance your home with bad credit

When to consider refinancing your mortgage

Several reasons may make it worthwhile to refinance your mortgage. Refinancing can be a hassle but can benefit homeowners by providing an influx of cash or freeing up funds on a monthly basis.

To change loan terms

A rate-and-term refinance can include switching from a shorter loan term to a longer loan term, for example, moving from a 15-year mortgage to a 30-year mortgage. This stretches out your payments, putting you in debt longer but with more manageable payments.

It’s also possible to refinance to a shorter loan term, although if your credit isn’t fantastic, it’s unlikely you’re ready to increase your monthly payments.

To reduce your interest rate or monthly payment

You can lower your monthly payment and the total you’ll pay over the life of the mortgage by refinancing to a lower interest rate. Always factor in closing costs on the refinance to determine whether you’ll save money overall.

“Ideally, if you are receiving a lower interest rate, you will be receiving a lower monthly payment,” said David Behymer, a loan officer at Union Home Mortgage in Cincinnati, Ohio. “When it comes to rate-and-term refinances, lenders must ensure there is a net benefit to do so.”

To take cash out

Another option is a cash-out refinance, though a poor credit score can make it tough to get approval. “A cash-out refinance is a way to tap into the equity in your home in the form of a lump sum payment back to you,” said Behymer. He also explained that most lenders don’t restrict how you may use the cash, so things like education, home renovations or personal expenses are common uses.

“Most loan programs allow for you to take out a loan for the cash-out refinance up to 80% LTV (loan-to-value),” said Behymer. Here’s a basic calculation for a cash-out refinance:

• $300,000 home value; you still owe $150,000
• $300,000 x 0.8 = $240,000
• $240,00 - $150,000 (the current lien on the property) = $90,000

This means you could theoretically pull out $90,000 minus closing costs through this refinance. Behymer added that VA loans may allow up to 100% LTV for a higher maximum cash-out option.

To remove mortgage insurance

For borrowers who put down less than 20% on their homes, paying PMI each month has a significant impact on overall budget. “I’ve seen PMI cost people hundreds of dollars on their monthly payment,” noted Behymer.

Still, you may not need to refinance to remove PMI, said Behymer. Instead, you can contact your mortgage servicer once you’ve reached 20% equity. Plus, as long as your payments are current, your lender is required to automatically remove PMI once your loan reaches 78% of the original principal, so you could also wait until that happens.

» MORE: Cash-out refinance vs. home equity loan

What credit score do you need to refinance?

The minimum credit score to refinance a mortgage depends on your loan type and lender requirements:

• Conventional loans: 620 minimum (some lenders require 640–660)
• FHA refinance: 580 for cash-out, as low as 500 for streamline refinances
• VA refinance: No official minimum, but most lenders prefer 620-plus
• USDA refinance: 600 to 640, depending on the lender

Most lenders consider a credit score below 580 as “bad credit,” while scores between 580 and 669 fall into the “fair” range. Good credit typically starts at 670, and excellent credit begins at 740 or higher.

Understanding these thresholds helps you identify which refinancing options are available based on your current financial situation.

Remember, your credit score isn't the only factor lenders evaluate. Debt-to-income ratio, home equity, employment history and payment records all play important roles in approval decisions. Some lenders may approve borrowers with lower scores if they have substantial equity or low debt-to-income ratios.

Conventional loan credit score requirements

Conventional refinance loans typically require a minimum credit score of 620, though some lenders set their standards higher at 640 or 660. Borrowers with scores closer to the minimum often face higher interest rates and may need to pay private mortgage insurance if their loan-to-value ratio exceeds 80%.

Higher credit scores unlock better terms. A score of 740 or above typically qualifies you for the most favorable interest rates, potentially saving thousands over your loan term. Lenders also consider your loan-to-value ratio — most conventional refinances require at least 20% equity in your home, though some programs accept as little as 5% equity with mortgage insurance.

Government-backed loan credit basics

FHA refinance loans accept credit scores as low as 580 for cash-out refinances and sometimes as low as 500 for streamline refinances if you have a strong payment history on your current FHA loan. VA loans don’t have official minimum credit score requirements, but most lenders prefer scores of 620 or higher for VA refinances.

USDA refinance programs typically require scores between 600 and 640, depending on the lender. These government-backed options offer more flexibility than conventional loans but include specific eligibility requirements beyond credit scores. Each program has unique benefits and restrictions covered in the following sections.

Ways to refinance with poor credit

Refinancing your home can offer lower monthly payments and savings over the life of the loan, but a bad credit score can make it challenging to qualify. You may look into government-backed options through FHA, VA or USDA loans if you’re eligible. Adding a co-signer to your loan may be an option as well.

Some options for refinancing your mortgage are more accessible than others if you have poor credit. Think through your reasons for wanting to refinance and whether any of these options could fit your situation.

FHA streamline refinance and cash-out options

If you already have an FHA loan, you can refinance with an FHA streamline to get a lower rate or switch from an adjustable-rate to a fixed-rate mortgage. This option requires no appraisal and minimal documentation, making it one of the fastest refinance paths for borrowers with bad credit.

FHA cash-out refinances allow you to tap into your home equity but require full underwriting, including an appraisal and credit review. Both options accept credit scores as low as 580 for cash-out refinances and sometimes as low as 500 for streamline refinances with strong payment history.

“Those with less-than-stellar credit may find relief by going the FHA route as FHA loans typically have lower credit score requirements compared to conventional loans,” said Brian Shahwan, a mortgage banker and broker at William Raveis Mortgage.

VA IRRRL and VA cash-out refinance

Veterans, active-duty service members and eligible surviving spouses have access to two VA refinance options:

• The Interest Rate Reduction Refinance Loan (IRRRL) is a streamline refinance for borrowers with existing VA loans, allowing you to lower your interest rate or switch from an adjustable-rate to a fixed-rate mortgage with minimal documentation and no appraisal required.
• VA cash-out refinances let you tap into your home equity or convert a conventional loan into a VA loan. This option allows up to a 100% loan-to-value ratio, meaning you can potentially refinance the full value of your home.

While the IRRRL requires an existing VA loan, cash-out refinances are available whether you currently have a VA or non-VA mortgage. Both programs typically require a 620 credit score, though individual lenders set their own minimums.

Fannie Mae RefiNow and Freddie Mac RefiPossible

If you currently have a conventional loan backed by Fannie Mae or Freddie Mac, you may qualify for specialized refinance programs designed for borrowers with limited equity and lower credit scores. RefiNow and RefiPossible accept credit scores as low as 620 and accommodate higher debt-to-income ratios than standard conventional refinances.

These programs can help you secure better rates even with bad credit, but eligibility is limited to borrowers whose existing mortgages are already owned by Fannie Mae or Freddie Mac.

USDA streamlined assist refinance

The USDA streamlined assist refinance program is limited to those with a USDA loan who have been current on the loan for at least 12 months. “USDA loans, while not directly related to credit score, generally have more lenient credit requirements, but are targeted to low-to-moderate income borrowers in rural areas,” noted Shahwan.

Using a co-signer

One option you may pursue is adding a co-signer whose credit is significantly better than yours. Behymer explained that co-signers mainly assist with income qualifications and strengthen your overall file. He cautions that if you have a 600 FICO score and have a co-signer with an 800 FICO score, you don’t necessarily gain the benefits of an 800 score.

Shahwan also notes that a co-signer isn’t necessarily going to help by adding a higher credit score to the mix. He added, “If the co-signer has low debt and substantial income, this could absolutely assist in qualifying the borrower by getting them into an allowable debt-to-income (DTI) ratio,” he added.

Shopping around for lenders

A general tip for refinancing your home with poor credit is to do your homework. Shop around and obtain quotes from a variety of lenders. Try to stick to prequalification, which only uses a soft credit pull, rather than preapproval. These are only quotes, but this way the process won’t harm your credit.

Traditional banks, online lenders and mortgage brokers may all have specific requirements to qualify for a mortgage refinance based on your credit score and other underwriting factors. Plus, each quote you obtain is something you can show to other potential lenders, which may lead them to make you a better offer.

Closing costs and net tangible benefit requirement

Refinancing isn't free — you’ll pay closing costs ranging from 2% to 5% of your loan amount. Understanding these expenses and calculating your break-even point helps you determine whether refinancing makes financial sense, especially when you have bad credit and may not qualify for the lowest interest rates.

Lenders often require a “net tangible benefit"” to approve your refinance, meaning the new loan must provide measurable financial improvement. This typically means lowering your interest rate by at least 0.5% to 1%, reducing your monthly payment or shortening your loan term.

Typical refinance closing costs

Closing costs to refinance typically range from 2% to 5% of your loan amount. On a $200,000 mortgage, expect to pay between $4,000 and $10,000. Borrowers with bad credit may face higher costs due to additional lender fees and private mortgage insurance requirements.

Major cost components include:

• Origination fees: 0.5% to 1% of loan amount
• Appraisal: $300 to $600
• Title insurance and search: $700 to $1,500
• Credit report: $25 to $50
• Recording fees: $100 to $250

Some lenders offer “no-closing-cost” refinances, but these typically come with higher interest rates that cost more over time.

How to calculate your break-even point

Divide your total closing costs by your monthly savings to find your break-even point. Here’s an example calculation:

• Closing costs: $3,000
• Monthly savings: $150
• Break-even point: $3,000 ÷ $150 = 20 months

If you plan to stay in your home longer than 20 months, refinancing makes sense. If you expect to move sooner, you won’t recoup your closing costs.

» LEARN MORE: How much does it cost to refinance?

Is it worth refinancing with poor credit?

Deciding whether to refinance with poor credit requires analyzing your potential savings against the costs and risks. While bad credit limits your options and typically results in higher interest rates, refinancing can still make financial sense in certain situations.

“As mortgages are not a one-size-fits-all, it really depends on [the] specific situation to justify whether now is a good time or not,” said Shahwan of William Raveis Mortgage. The key is determining whether your savings justify the upfront costs and long-term commitment.

Calculating your potential savings

Start by comparing your current monthly payment to what you'd pay with a refinanced loan. Request quotes from multiple lenders and calculate both your monthly savings and total interest savings over the life of the loan. Key calculations to make include:

• Monthly payment reduction (current payment minus new payment)
• Total interest paid over the remaining loan term versus the new loan term
• Closing costs divided by monthly savings (your break-even point)
• Total savings after recouping closing costs

Use a refinance savings calculator to model different scenarios. Even a 0.5% rate reduction can save thousands over a 30-year mortgage, but closing costs may eliminate short-term benefits. Factor in whether you'll pay private mortgage insurance on the new loan if your equity is below 20%.

Short-term vs. long-term goals

Your timeline for staying in the home significantly impacts whether refinancing makes sense. If you plan to move or sell within the next few years, you may not stay in the home long enough to reach your break-even point and benefit from refinancing.

Consider waiting to refinance if you're planning to relocate soon or if you expect your credit score to improve significantly within six to 12 months. A higher credit score could qualify you for substantially better rates, making it worth the wait. However, if mortgage rates are rising or you need immediate payment relief, refinancing now might be your best option despite less-than-ideal terms.

Risks of refinancing with bad credit

Refinancing with bad credit comes with higher costs that can strain your budget. Lenders charge higher interest rates to offset the perceived risk, meaning you'll pay more over the loan's life compared to borrowers with good credit. You may also face steeper origination fees and lender charges.

If you have less than 20% equity in your home, you’ll likely need to pay private mortgage insurance, adding $50 to $200-plus monthly to your payment.

Extending your loan term to lower monthly payments can also backfire — you’ll pay significantly more in total interest even if individual payments decrease. Carefully evaluate whether the monthly savings justify these long-term costs before committing to a refinance.

How to improve your credit for a refinance

Although credit scores aren’t the sole factor in whether you’re approved for refinancing, you’ll be more likely to get favorable terms if you can improve your credit first. The timeline for credit improvement depends on your starting point and which strategies you employ, but most borrowers see meaningful results within three to 12 months.

Focus on the factors that matter most to lenders. Payment history and credit utilization account for 65% of your FICO score, making them the most impactful areas to address. A strategic approach targeting quick wins alongside long-term habits delivers the best results.

Rapid ways to boost your score

If you need to improve your credit score fast, focus on strategies that can show results within 30 to 90 days. These quick actions can increase your score enough to qualify for better refinancing terms or move you into a higher credit tier with lower interest rates:

• Pay down credit card balances: Reducing your credit utilization ratio has the fastest impact. Credit utilization makes up 30% of your FICO score, so lowering the amount of available credit you're using — ideally below 30% and optimally below 10% — can boost your score within one billing cycle.
• Dispute credit report errors: Review your credit reports from all three bureaus (Equifax, Experian and TransUnion) for inaccuracies. Errors like incorrect late payments or accounts that don’t belong to you can be disputed and removed within 30 days, potentially increasing your score immediately.
• Become an authorized user: Ask a family member with excellent credit and low utilization to add you as an authorized user on their credit card. Their positive payment history can appear on your credit report within weeks.
• Pay off small collection accounts: Settling minor collections or charge-offs can prevent them from dragging down your score, though the impact varies by scoring model.

Request a rapid rescore through your lender after making these changes to see your updated credit score reflected faster during the refinance application process.

Long-term strategies for sustained credit health

Building credit for refinancing over six to 12 months requires consistent habits that strengthen your credit profile. These strategies take longer to show results but create lasting improvements that benefit you beyond your immediate refinancing goals:

• Pay all bills on time and in full: Payment history makes up 35% of your FICO score — the single largest factor. Set up automatic payments to avoid missing due dates. Even one late payment can drop your score by 50 to 100 points.
• Avoid opening new credit accounts: New credit inquiries and accounts lower the average age of your credit history, which comprises 15% of your score. Hold off on applying for new loans or credit cards while preparing to refinance.
• Maintain credit mix: Having different types of credit (credit cards, installment loans, mortgage) demonstrates responsible borrowing and accounts for 10% of your score. Don’t open new accounts just to mix, but maintain existing diverse accounts.
• Improve your debt-to-income ratio: While not directly part of your credit score, lenders evaluate your DTI when approving refinances. Pay down installment loans and avoid taking on new debt to strengthen your overall financial profile.

Monitor your credit report regularly to track progress and catch any new errors. Most borrowers see 20- to 100-plus point increases within six to 12 months by consistently applying these strategies.