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Can You Refinance Your Home With Bad Credit? 

Refinancing your home can be an effective way to lower your monthly mortgage payments, secure a better interest rate, or access equity for various financial needs. If you have bad credit, you may wonder if refinancing is still a viable option for you. When you have excellent credit, it can be easier to leverage your creditworthiness and shop around with various lenders. Those lenders in turn compete for your business, which allows you to receive the best rates possible.  

Refinancing Options For Borrowers With Bad Credit 

Talk To Your Current Lender 

If you’re looking to refinance, talking to your current mortgage lender that you already have an existing relationship with may be the best option. If you have a history of making on-time payments, your lender may be willing to overlook your credit score. 

Cash-Out Refinance 

A cash-out refinance pays off your existing mortgage and allows you to borrow money from the equity you have in your home. Unlike some other refinancing options, like a home equity line of credit (HELOC), a cash-out refinance is available to borrowers with minimum credit scores of 620. These loans may also provide money you could use to pay down debts, which can help increase your score. 

If you have a government-backed loan, like a VA or FHA loan, you may qualify with even lower credit.   

FHA Streamline Refinance 

An FHA Streamline Refinance is only available to borrowers with FHA loans, and it replaces your current mortgage with a new loan at a lower rate. A Streamline Refinance is much easier to qualify for than other refinancing programs. Depending on the streamline, there may not be a credit check required.  

VA Interest Rate Reduction Refinance Loan (IRRRL) 

A VA Interest Rate Reduction Refinance Loan (IRRRL) replaces your current VA loan with a new loan at a lower interest rate. It’s also sometimes referred to as a VA Streamline Refinance. Like the FHA Streamline Refinance, there may be no credit check required. 

USDA Streamlined Assist Refinance Program 

The USDA Streamlined Assist Refinance Program is available to current USDA borrowers who have made at least 12 consecutive mortgage payments. Your lender won’t check your credit, DTI ratio or income, so it can be a good option for USDA borrowers with bad credit. 

Fannie Mae’s RefiNow Program 

Fannie Mae’s RefiNow program is a low-income refinance option. The program is available to borrowers whose income doesn’t exceed the median income in their area. Borrowers who qualify can receive a lower interest rate, monthly payments and lower appraisal expenses. In addition, with a credit score requirement of at least 580, some borrowers with poor credit could qualify for the program. It is important to note that with this option the borrower cannot have missed mortgage payments within the last 6 months and no more than one missed payment over the last year.  

Freddie Mac’s Refi Possible Program 

Freddie Mac’s Refi Possible program is a good option for low and moderate-income borrowers. The credit score requirement for this loan is 580, so the Refi Possible program is available to many borrowers with bad credit. To qualify, your income must be equal to or less than 100% of the area median income. 

Co-signing With A Friend Or Relative 

Refinancing with a creditworthy co-signer is another option for borrowers with bad credit. Using a co-signer allows you to take advantage of that person’s good credit and earn better rates and terms on your mortgage. This option should only be used when you have someone to co-sign for you and you’re 100% certain you can manage the mortgage payments.  

How To Improve Your Credit Before Refinancing 

  • Track your credit score. Did you know that 34% of Americans find at least one error on their credit report? If your credit report contains errors, it can drag down your score. You can get a free credit report every 12 months. 
  • Improve your credit utilization rate and Debt-to-income (DTI) ratio. 
  • Don’t open new credit accounts. 
  • Pay all bills on time, including existing mortgage payment. 
  • Build up your savings. If your lender notices you have additional cash reserve, you may be more likely to be approved. 

Refinancing your home with bad credit may pose challenges, but it’s not impossible. By exploring alternative options, working with specialized lenders, and taking steps to improve your credit, you may still be able to secure a refinancing solution that meets your needs. Always consult with mortgage professionals to explore your options and determine the best course of action based on your individual circumstances.  

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