Refinancing Your Mortgage With Bad Credit
Refinancing a home loan involves clearing your existing mortgage and replacing it with a fresh one. It can help you repay the outstanding balance with a new interest rate and term. Best of all, a shorter term and lower rate will help you save money overall.
When wondering “can I refinance my home with bad credit,” it’s wise to review all the eligibility requirements to understand your likelihood of approval. Just like qualifying for any new type of financing, you need to qualify for refinancing. For borrowers with less stellar credit scores, explore the options you have available for refinancing.
What Refinancing Options Do You Have?
The cut-off credit score for refinancing a conventional, fixed-rate home loan is around 620. There are additional factors that affect your chances of approval. These factors include the following.
- Your debt-income ratio (DTI)
- Your loan-to-value ratio (LTV)
- The equity you already have in your house
- The amount of cash you have in your savings account
- The mortgage you have, which could be conventional, VA, FHA, or USDA
When you have a bad score, qualifying for the best rates and terms will be more difficult. Still, there are some options for you to refinance a home loan.
Refinance an FHA Loan
There are a few options available with you when you have an existing FHA loan. The qualifying criteria are generous, but you need to have made on-time payments for at least the past 12 months to benefit from this option.
- FHA Streamline Refinance - If you consistently paid on time for the past 12 months, you can qualify for refinancing at a lower rate. The program offers many advantages given there is no credit check, income verification, or lengthy paperwork. The eligibility criteria are simple, and they do not review your DTI ratio and might not require an appraisal either. The amount should not exceed the original loan value without an appraisal.
- FHA Cash-Out Refinance - This option is ideal for people who have scores between 580 and 600 or above, which is the lowest credit score to refinance mortgage. The program offers a maximum LTV of 85%.
- FHA Simple Refinance - You can refinance your existing mortgage into a fixed-rate loan or ARM (adjustable rate mortgage). There will be a credit check, income verification, and home appraisal.
VA & USDA Refinance Options
These options are for any existing VA and USDA loans. Here are two available refinance programs specifically designed for outstanding VA loans.
- The Interest Rate Reduction Refinance Loan (IRRRL) Program - This program is available to active duty servicemembers, veterans, and spouses who already have VA-backed home loans and are seeking lower rates.
- The VA Cash-Out Refinance Program - You can use it with either a conventional or VA loan, where the equity acts as collateral for accessing excess cash on the new loan for other purposes.
For either of these VA options, you need to have a credit score of 620 or above, which is a good credit score to refinance mortgage along with the requisite military qualifications..
For outstanding USDA loan balances, the Agriculture Department offers its own Streamline-Assist Refinance and Streamline Refinance programs. The former is identical to the FHA Streamline Refinance program. It does not require a credit check, a new appraisal, or your DTI ratio. You can take advantage of the program even if you have little or no equity.
The USDA Streamline Refi and Non-Streamline Refi programs are identical to FHA Streamline Refi and VA IRRRL programs. You need to have an USDA loan for over six months, should not borrow more than the original loan amount, and meet their eligibility requirements.
Other Options To Refinance With Bad Credit
For those who don’t meet the criteria for participating in specialty programs, options are still available. On average, you need at least 20% equity and must meet the loan-to-value (LTV) requirements. Your credit score should also not be less than 620. Moreover, you must additionally keep these additional points in mind.
- Improve your score before you apply for a refi given any prospective lender will do a hard credit pull
- Contact your current mortgage lender. Your chances of realizing a successful outcome will improve because you are an existing customer.
- Contact a credit union. They often help borrowers with less-stellar credit scores. Becoming a member which could improve your refinancing eligibility chances.
Bad credit can create problems, but doesn’t have to be a dealbreaker when exploring options for refinancing an outstanding home loan. While it might feel difficult to navigate, there are still a range of options available designed to suit your needs.
Moreover, to work on your score before refinancing, consider a personal loan for bad credit to improve your creditworthiness and approval likelihood.
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