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. However, if you have bad credit, you may wonder if refinancing is still a viable option for you. The good news is that while having excellent credit makes it easier to shop around with various lenders and receive the best rates, you still have options even with a less-than-perfect credit score.
Refinancing Options for Borrowers With Bad Credit
Talk to Your Current Lender
If you’re looking to refinance, talking to your current mortgage lender may be your best option. If you have a history of making on-time payments, your lender might be willing to overlook your credit score. Maintaining a good relationship with your lender can sometimes make all the difference.
Cash-Out Refinance
A cash-out refinance pays off your existing mortgage and allows you to borrow money from the equity 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. Additionally, the money you receive can be used to pay down debts, which can help improve your credit score.
FHA Streamline Refinance
An FHA Streamline Refinance is only available to borrowers with FHA loans and replaces your current mortgage with a new loan at a lower rate. This type of refinance is much easier to qualify for than other programs, and 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. Often referred to as a VA Streamline Refinance, this option may also not require a credit check.
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. This program does not require a credit check, DTI ratio, or income verification, making it 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 available to borrowers whose income doesn’t exceed the median income in their area. With a credit score requirement of at least 580, this program is accessible to many borrowers with poor credit. Note that you 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 designed for low and moderate-income borrowers, requiring a minimum credit score of 580. 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. Using a co-signer allows you to take advantage of their good credit to earn better rates and terms on your mortgage. This should only be considered if you have someone willing to co-sign and if you are certain you can manage the mortgage payments.
How to Improve Your Credit Before Refinancing
While various refinancing options are available for those with bad credit, improving your credit score can open up even better opportunities. Here are some steps to take:
- Track Your Credit Score: Errors on your credit report can drag down your score. You can get a free credit report every 12 months to check for inaccuracies.
- Improve Your Credit Utilization Rate and DTI Ratio: Aim to use less than 30% of your available credit and reduce your overall debt relative to your income.
- Don’t Open New Credit Accounts: New accounts can lower your average account age and result in hard inquiries, reducing your credit score.
- Pay All Bills on Time: Timely payments on all your bills, including your existing mortgage, are crucial for a good credit score.
- Build Up Your Savings: Additional cash reserves can make you more appealing to lenders.
Conclusion
Refinancing your home with bad credit can pose challenges but is 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.
If you’re considering refinancing, especially through FHA Streamline Refinance or utilizing the benefits of a soft pull on your credit, take the first step today. Understanding your options and taking proactive measures can pave the way to better financial health and a more manageable mortgage
