10 min read
How to Refinance a Mortgage with Bad Credit
-
-
Copied link to Clipboard!
Refinancing your mortgage is a strategic move that sometimes makes financial sense. It lets you lower your interest rate, reduce monthly payments, or change loan terms to suit your needs better. However, if you have poor credit, the path to refinancing becomes more complex. This guide will help you understand how to refinance a mortgage with bad credit, the challenges you might face, and strategies to improve your chances of approval.
LESSON CONTENTS
Understanding mortgage refinancing with bad credit
Mortgage refinancing involves replacing your existing home loan with a new one, often with different terms or interest rates. For homeowners with poor credit—typically a FICO score between 300 and 579—the mortgage refinance process with bad credit can be challenging but not impossible.
Poor credit can result from various factors, such as missed payments, high credit utilization, or a history of defaults. Despite these setbacks, refinancing may still be necessary or beneficial. For instance, you might seek to:
- Lower your monthly payments
- Switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage
- Access home equity for renovations or debt consolidation
If you have poor credit, know that you are not alone. Approximately 12.6% of Americans have poor credit scores (Horymski, 2024). The first step toward a successful mortgage refinance with bad credit is understanding and improving your financial situation.
Challenges of refinancing with bad credit
Refinancing a mortgage with poor credit can come with specific challenges, including:
- Higher interest rates: Lenders often charge higher mortgage refinance rates to offset the risk of lending to someone with poor credit. These increased rates can reduce the potential savings from refinancing.
- Stricter qualification criteria: Lenders may impose more stringent requirements, such as higher income thresholds or lower debt-to-income (DTI) ratios.
- Limited lender options: Many lenders do not offer refinancing options for borrowers with bad credit, which can narrow your choices significantly.
- Equity requirements: You may need substantial equity in your home to approve a refinance, as lenders are more cautious with high-risk applicants.
- Additional fees and costs: Refinancing with poor credit often comes with higher closing costs or additional fees, increasing the overall expense of the process.
Tips to improve your chances of refinancing
Despite the hurdles mentioned above, there are practical steps you can take to enhance your chances for a successful mortgage with bad credit:
1. Check and improve your credit score
Obtain a free copy of your credit report from AnnualCreditReport.com and review it for errors or discrepancies. Correcting inaccuracies and focusing on the following can boost your score:
- Paying bills on time: Payment history accounts for 35% of your FICO score (myFICO, 2024).
- Reducing credit card balances: Lowering credit utilization to improve your creditworthiness.
- Avoid new debt: Limiting new credit inquiries helps maintain your score.
2. Increase home equity
Building more equity in your home can make you a more attractive borrower. You can achieve this by:
- Making extra mortgage payments: Reduces your principal balance faster.
- Home improvements: Enhancing your property's value increases equity.
- Market appreciation: Waiting for your home's value to rise due to market conditions. Between 1992 and 2023, U.S. annual house price growth averaged 4.63% (Trading Economics, 2024).
3. Reduce your debt-to-income ratio
Lenders prefer borrowers with a DTI ratio below 43%. You can lower your DTI by:
- Paying off outstanding debts: Focus on high-interest debts first.
- Increasing your income: Consider a part-time job or side business.
4. Save for closing costs
Prepare for closing costs, which typically range from 2% to 5% of the loan amount. Having sufficient funds demonstrates financial readiness.
5. Consider a co-signer
A co-signer with good credit can strengthen your application. However, ensure they understand the responsibility, as they become equally liable for the loan.
Alternative options for homeowners with bad credit
If traditional refinancing options are unavailable due to poor credit, don't lose hope. There are programs for individuals with poor credit seeking to refinance their mortgage. Consider these alternatives:
FHA Streamline Refinance
This option is available to homeowners with an existing FHA loan. The program allows refinancing without extensive credit checks or income verification. Benefits include:
- No appraisal required
- Limited documentation
- Reduced mortgage insurance premiums
VA Interest Rate Reduction Refinance Loan (IRRRL)
For eligible veterans with existing VA loans, the IRRRL offers a streamlined refinancing process with minimal credit requirements.
USDA Streamlined Assist Refinance
Homeowners with USDA loans can refinance without credit score requirements or property inspections.
Fannie Mae’s RefiNow
This refinance program is for low-income borrowers with less-than-perfect credit. It has no minimum credit score requirement and allows a DTI of up to 65%.
Eligibility Requirements:
- Existing loan ownership: Your current mortgage must be owned by Fannie Mae.
- Income limits: Your income must be at or below 100% of the area median income (AMI).
- Good payment history: No missed payments in the last six months and no more than one in the past 12 months.
Freddie Mac’s Refi Possible
Similarly, Freddie Mac’s Refi Possible provides refinancing opportunities for borrowers with modest incomes and less-than-ideal credit scores. To qualify, your mortgage must be Freddie Mac-owned, and your income must not exceed 100% of the AMI.
Loan modification programs
If refinancing isn't possible, your current lender may offer a loan modification to adjust your mortgage terms, making payments more manageable.
Hardship assistance programs
Some lenders offer mortgage forbearance for borrowers facing financial difficulties due to unemployment, medical issues, or other hardships. Benefits include a temporary reduction or pause in mortgage payments and no penalties or additional fees during the forbearance period.
Steps to apply for a mortgage refinance with bad credit
Refinancing a mortgage with poor credit requires careful preparation and attention to detail. Follow this step-by-step guide for the best chance of success:
1. Assess your financial situation
- Credit score: Obtain your exact score and understand where you stand.
- DTI ratio: Calculate your debt relative to your income to understand affordability.
- Home equity: Determine your property's current market value minus your remaining mortgage balance.
2. Research lenders
Look for lenders who specialize in refinancing mortgages with bad credit. If you have an FHA, VA, or USDA loan, consider their streamlined refinance programs for fewer requirements.
3. Gather necessary documentation
Prepare the following documents:
- Proof of income: Pay stubs, W-2s, tax returns.
- Asset statements: Bank accounts, retirement funds.
- Debt information: Statements for credit cards, loans, or other liabilities.
4. Prequalify with multiple lenders
Prequalify with several lenders to compare loan terms without impacting your credit score. Review interest rates, fees, and conditions to find the best fit.
5. Submit formal applications
Choose the lender with the most favorable terms and submit a formal application. Be prepared for a hard credit inquiry, which may lower your credit score.
6. Lock in your interest rate
Once approved, lock in your interest rate to secure against market fluctuations during the closing process.
7. Close on the loan
Review all closing documents on your new refinance loan carefully. Ensure you understand the loan terms and conditions, applicable fees and closing costs, and your new payment schedule.
FAQs
What are the main challenges of refinancing a mortgage with bad credit?
Lenders view borrowers with poor credit as higher risk, affecting loan terms and approval chances. As a result, individuals with poor credit face higher interest rates, stricter lending criteria, limited lender options, higher equity requirements, and additional fees.
How can I improve my chances of getting approved for a mortgage refinance with bad credit?
Improve your credit score by correcting errors on your credit report, paying bills on time, and reducing debts. Additionally, consider other moves like increasing your home equity by making extra mortgage payments, lowering your DTI ratio, saving for closing costs, and considering a co-signer. Using a mortgage refinance calculator can help estimate new monthly mortgage payments and affordability.
Are there specific lenders that specialize in bad credit mortgage refinancing?
Yes, some lenders cater to borrowers with poor credit. Many credit unions and mortgage lenders also offer specialized programs like Fannie Mae's RefiNow and refinancing options for government-backed loan products, including FHA, VA, and USDA loans.
What alternative options do I have if I can't refinance my mortgage due to bad credit?
Alternative options include Fannie Mae’s RefiNow, Freddie Mac’s Refi Possible, FHA Streamline Refinance, VA Interest Rate Reduction Refinance Loan (IRRRL), and USDA Streamlined Assist Refinance. Additionally, work with your current lender for possible loan modifications or hardship assistance programs.
What steps should I follow to apply for a mortgage refinance with bad credit?
- Assess your financial situation: Evaluate your credit score, debt-to-income ratio, and home equity to understand your eligibility and identify areas for improvement.
- Research specialized lenders: Look for lenders or programs designed for borrowers with poor credit.
- Gather necessary documents: Prepare financial documents such as pay stubs, tax returns, bank statements, and a list of your debts to support your application.
- Prequalify with multiple lenders: Obtain preliminary loan estimates from different lenders to compare interest rates and terms without affecting your credit score.
- Submit formal applications: Choose the lender with the best offer and submit a complete application, knowing it will trigger a hard credit inquiry.
- Lock in your interest rate: Once approved, secure the quoted interest rate to avoid market fluctuations during the processing period.
- Close on the loan: Review all closing documents carefully, ensure all terms are correct, and finalize the refinancing process by signing the necessary paperwork.
Citations
Chris Horymski (2024, April 17). How Many Americans Have an 800 Credit Score or Greater? https://www.experian.com/blogs/ask-experian/how-many-americans-have-800-credit-score/
myFICO (2024). What's in my FICO® Scores? https://www.myfico.com/credit-education/whats-in-your-credit-score#:~:text=FICO%20Scores%20are%20calculated%20using,and%20credit%20mix%20(10%25)
Trading Economics (2024). United States House Price Index YoY. https://tradingeconomics.com/united-states/house-price-index-yoy
*PLEASE NOTE: This article is intended to be used for informational purposes and should not be considered financial advice. Consult a financial advisor, accountant or other financial professional to learn more about what strategies are appropriate for your situation.
Related Resources
View All
10 min read
A Football Fan’s Guide to Budgeting for Game Day
Football, friends, and food are a winning trio, but without a game plan, the bill can tackle your wallet before the first snap. This guide turns tips for creating a budget-friendly game day party into an action-packed playbook so you can savor every touchdown without fumbling your finances.
10 min read
5 Rookie Money Mistakes (And How to Avoid Them)
Have you ever had an unexpected bill wipe out your good intentions, or caught yourself wondering, “What should I do with my money?” You’re not alone. Late-night searches for money advice can leave anyone confused. One blog tells you to skip the lattes, while another pushes a cryptocurrency side hustle. Instead of adding to the noise, this guide breaks down five of the most common money mistakes and, more importantly, how to sidestep them.
12 min read
How to Budget as a College Student
Every semester delivers the same double punch: a tuition bill larger than last term and a flood of incidental costs — textbooks, lab fees, late-night pizzas — that evaporate paychecks and loan disbursements at dizzying speed. The average college student spends $38,270 per year on tuition, books, supplies, and daily living expenses. In a private campus, that bill rises to $58,628 (Hanson, 2025). When numbers grow that large, hoping for the best is not a plan; a written budget is. This guide offers a practical roadmap for how to budget as a college student—from mapping cash flows, choosing tracking tools, and cutting expenses without trimming the joy out of campus life.
5 min read
How to Start Saving Money: Clever & Easy Steps
If you vowed this is the year you get ahead financially only to watch payday deposits disappear, you’re not alone. Gillespie (2025) notes that 59% of Americans still can’t cover a $1,000 emergency without borrowing or selling something. Meanwhile, the U.S. personal-saving rate is languishing below 4 percent—about half its long-term average (BEA, 2025). These sobering numbers explain why learning how to start saving is so critical. The encouraging news? A few clever ways to save money can transform vague intentions into steady progress.
6 min read
How Can I Save Money? Here Are 10 Easy Tips
How can I save money? Picture your money as water flowing through a series of channels. Some streams nourish long-term goals, others evaporate into impulse buys, and a few leak through cracks you never noticed. Redirecting enough of that flow toward the bucket that matters most — savings for emergencies and retirement — guarantees long-term security. Savings protect your future. Yet the typical American household saves just 3.9 % of disposable income as of March 2025, roughly half the pre-pandemic norm (St. Louis Fed, 2025). The good news is that small, deliberate changes can double or triple that rate without feeling like deprivation.
Below, you’ll find proven, beginner-friendly money saving strategies you can start on today. By the end, you’ll have a clear map of ways to save money, from the daily latte decision to bigger moves like automating transfers or picking a side hustle.
10 min read
Summer Vacation Ideas on a Budget
Rising airfares or tight budgets don’t have to cancel summer fun. A thoughtfully planned summer vacation on a budget can restore energy, create memories, and leave room in the checking account for next semester’s textbooks or an unexpected flat tire. Let’s nail down the numbers and map out low-cost destinations and close-to-home adventures. We also outline painless saving tricks and digital tools that track every dollar and make family summer vacation ideas on a budget a practical reality.
10 min read
How to Become Financially Independent
Financial independence (FI) isn’t a distant fantasy reserved for trust-fund heirs or Silicon Valley founders. Instead, it’s a math-driven destination you can plot on a timeline — then march toward with deliberate choices every payday. In plain terms, financial independence means having the freedom and flexibility to make choices that align with your goals - without constantly worrying about money. It’s about feeling secure and confident in your day-to-day life and your future. In the next few minutes, you’ll learn the core habits, sequential steps, and digital tools that turn that definition into reality. By the end, you won’t just understand how to become financially independent; you’ll know which actions to take.
8 min read
Can You Pay Rent with a Credit Card?
Can you pay rent with a credit card? Short answer: yes. Absolutely, but only if your landlord or a third-party processor will take the plastic and you are prepared to shoulder—or cleverly avoid—the fees. Roughly 22% of U.S. renters already put monthly housing costs on debit or credit cards, according to a 2024 payment-trends study by property-tech firm Zego (Salmonsen, 2024). That slice is growing because tenants want smoother cash flow and richer rewards, while landlords crave on-time payments. Still, every swipe passes through a maze of surcharges, interest rates, and utilization limits. Before you tap “Pay,” you need a plan to ensure you have a smart credit card management strategy in place.
10 min read
Is it Wrong to Let Someone Use Your Credit Card?
When someone you trust — a spouse, adult child, sibling, or close friend — asks to use your credit card, the request feels innocent. Maybe it’s for groceries, a plane ticket, or an emergency car repair. But even with the best intentions, lending your credit card can end up with disastrous consequences. So, you might be asking, is it wrong to let someone use my credit card?
The short answer: Yes, it can be wrong — legally, financially, and ethically — depending on the circumstances. Even if you trust the person, the risks often outweigh the convenience. Below, we unpack the hazards, the narrow circumstances when sharing your credit card can work, and safer alternatives that protect you.
8 min read
Improving Your Debt-to-Income Ratio
In Q3 2024, Americans spent 11.3% of their disposable income on household debt payments (St. Louis Fed, 2024). Still, some households suffer massive debts, using over 50% of income to service debt. When your debt payments consume too much of your monthly income, lenders view you as a riskier borrower. This results in unfavorable loan terms, higher interest rates, or loan denials.
Understanding how to improve your debt-to-income ratio helps you qualify for better financing options. In simple terms, your debt-to-income ratio (DTI) computes the percentage of your income that goes toward paying debts each month. In this article, we’ll explain how to compute your DTI ratio, what is a good debt-to-income ratio, the best debt-to-income ratio for various loans and strategies for lowering it.
10 min read
What Is Cash-Out Refinancing?
What is cash-out refinance? It is a mortgage option that lets homeowners replace their existing home loan with a new one and, in the process, convert a portion of their built-up home equity into cash. In other words, if you have substantial equity in your property, you can refinance it for a loan amount that exceeds what you currently owe. The difference between the new loan’s principal and your remaining mortgage balance is then disbursed to you as a lump sum of cash.
A cash-out refinance can be a powerful way to consolidate debt, fund home renovations, or address pressing financial needs. Moreover, mortgage refinance rates are often lower than those of credit cards or unsecured loans. So, how does a cash-out refinance work? Read on for details and the pros and cons.
8 min read
How to Use Personal Loans for Debt Consolidation
You may find yourself overwhelmed by multiple high-interest debts and unsure how to regain control. One way that has helped many people simplify their finances is using personal loans for debt consolidation. This article will provide actionable advice to help you consider whether personal loan debt consolidation might be the solution you need.