The Options Available to Borrowers With Less Than Perfect Credit Scores

If you are wondering what your options are for refinancing a mortgage with bad credit, you aren't alone. Credit scores can be difficult to maintain, especially if your financial situation changes suddenly. Refinancing can be a great way to take advantage of lower interest rates and longer terms, which means lower monthly installments. That's great news for those looking to save in the immediate future. But refinancing requires a credit check, which may not be great news for those whose scores have slipped over the years.

In this article we go over the options that are available to those who are looking to refinance with poor credit.

First, a Breakdown of Scores

Credit scores can be confusing. Because there are three major consumer credit bureaus, it's possible to have different credit scores; for example: a FICO score based on your TransUnion report, a score based on your Equifax report, and another score based on your Experian report.

Here's a breakdown of FICO score ranges as interpreted by Experian:

  • 800-850: Excellent
  • 740-799: Very Good
  • 670-739: Good
  • 580-669: Fair
  • 300-579: Very Poor

So what's the minimum credit score needed to refinance a mortgage? For a conventional refinance, it's generally 620 or higher. That being said, certain government programs only require a score of 580 or above or don't have mandated minimum credit score requirements at all. Keep in mind,  however, that those without minimum score requirements will likely come with less favorable rates or terms for the borrower.

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1. Chat With Your Current Lender

By working with a lender to obtain a mortgage, you establish a relationship with them. You've likely met multiple times, and they know all that there is to know about you, at least in a financial sense.

That's why they may be more willing to work with you than you may think, especially if you've been paying your installments on time. If you're interested in refinancing, chat with your current lender first. They may have programs you aren't aware of and, if you've been a trustworthy borrower up until now, will likely want to continue working with you.

2. Consider a Cosigner

Those with less than perfect credit ratings often turn to a family member when it comes time to refinance. Having a mortgage cosigner may allow you to secure more competitive rates than you would qualify for on your own, and instills more confidence in lenders, as someone who has a proven track record of managing money is backing you.

There are things to consider when it comes to your mortgage and a cosigner, and the decision to add someone to your mortgage shouldn't be taken lightly. Your cosigner is taking on a significant amount of risk, all so that you can benefit from the financial history they have spent years building. Be sure that both you and your cosigner are well aware of all the risks associated with cosigning a mortgage. You should also have an emergency fund set up so that if your financial situation changes, you have a backup source of money you can rely on, rather than solely relying on your cosigner.

3. Look Into an FHA Streamline Refinance

Are you a current FHA borrower? Then you may want to consider the FHA Streamline Refinance program (HUD)! You won't face a significant amount of new paperwork because you already have an FHA-backed loan.

What are some of the perks of this program? Generally, the lender:

  • Isn't required to run a credit check
  • Doesn't have to verify income
  • Doesn't need a high-cost appraisal

Since the process is streamlined (hence the name), it's typically very quick and easy. Just like other refinancing options, there are closing costs, but many people with below-average credit scores find an FHA Streamline Refinance to be very beneficial.

Keep in mind that every lender is different. Just because a lender isn't required to do certain things doesn't mean that it won't. It is important to research a lender's specific requirements before starting the refinancing process.

4. Do You Have a VA Mortgage?

If you have a VA mortgage, an Interest Rate Reduction Refinance Loan (IRRRL) may be the best move for you. We wrote about it in depth here.

According to VA.gov, the advantages of an IRRRL may include:

  • Securing a lower interest rate
  • Making your payments more stable by going from an adjustable rate to a fixed one

A lower interest rate means lower monthly payments, which is very appealing for most borrowers. It's important to note that if you're eligible for an IRRRL and decide to move forward with one, you'll need to pay a VA funding fee, which can be included in the new loan so you don't have to pay it up front. There's also the interest and closing costs to factor in, so be sure to consider your bottom line before moving forward.

If this move is for you, you'll go through a mortgage company, private bank, or credit union, not the Department of Veterans Affairs.

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5. If You Have a Score of 620 or Higher

If you're on the higher end of low in terms of your credit score, it may be time to consider a cash-out refinance. This will allow you to consolidate your debt and focus on just one payment, which could help you rebuild your credit rating over time.

Keep in mind that it's generally required that borrowers have a credit score of 620 and above, and have at least 20 percent equity in their home to be eligible for a cash-out refinance.

Again, every lender is different. That's why it's important to thoroughly compare all available options before making any decisions, especially when those decisions impact your financial health.

A cash-out refinance has the potential to stop your credit score from slipping below 620 if you have a large amount of debt with payments that you'll likely fall behind on. Many borrowers use a cash-out refinance to pay down debts with high interest rates. If you have several costly bills in your near future, a cash-out refinance is worth researching.

Explore Rates Today

So, can you refinance your mortgage with bad credit? In many cases, the answer is yes. Don't forget to compare, compare, compare! By comparing lenders, you can be confident that you are securing competitive rates. Lendgo can help you connect with trusted lenders right this second! With no obligation to refinance, why not explore the rates you qualify for today?