Refinancing your home loan could save you money as mortgage rates have plunged to record lows. You may also consider refinancing to shorten or lengthen your repayment term or to extract cash from your home equity.
If your credit score is less than perfect, you may question whether you can refinance your mortgage, especially as the coronavirus pandemic has made loans harder to get.
A negative credit history can make refinancing a mortgage difficult but not impossible. Here's more you need to know about refinancing with bad credit.
[Read: Best Mortgage Refinance Lenders.]
What Is the Minimum Credit Score to Refinance?
Every lender has its own minimum credit score to refinance.
The minimum credit score to refinance may hinge on the type of mortgage you would like. Lenders may set the minimum at 620 to refinance a conventional loan, but you could qualify for FHA streamline refinancing with your payment history rather than your credit score.
Your credit score is a key factor for refinancing approval, and stricter lending requirements in the wake of the coronavirus mean your finances will come under even closer scrutiny. Keep in mind that you will not only need to meet credit score requirements but also show stable income to qualify for refinancing with bad credit.
"The refinance landscape has changed in that lenders are more concerned about the borrower's ability to repay the loans based on the recent wave of job losses," says Eric Jeanette, owner of Dream Home Financing, a mortgage lending resource.
Can You Refinance With Poor Credit?
Refinancing with poor credit starts with understanding what poor credit means.
A FICO score between 300 and 579 falls in the poor range, and borrowers with poor scores are considered high risk and more likely to be denied credit. But that doesn't necessarily mean you'll be locked out of refinancing with bad credit.
You might be able to get a refinance loan with bad credit, as long as you have not missed a mortgage payment by more than 30 days, says Ralph DiBugnara, president of Home Qualified, a digital homebuying resource.
"If your credit score is below 580, it's still very difficult to refinance," says DiBugnara, who is also vice president of mortgage lender Cardinal Financial. "What homeowners should be aware of is that their mortgage payment being made on time is still the most important."
Can You Refinance With a 550 Credit Score?
A 550 credit score puts you squarely in the poor credit range, which may limit your options for refinancing your mortgage. You may need to skip conventional mortgage loans and focus on government-backed loans.
FHA streamline refinance loans have no hard-and-fast credit score requirements you need to meet if you're current on your payments. This type of loan simply improves your terms, helping you reduce your monthly payment to make paying on time even easier.
If you have a loan backed by the U.S. Department of Veterans Affairs or the U.S. Department of Agriculture, you may consider a VA or USDA refinance loan. With these refinancing options, bad credit doesn't necessarily count against you, as long as you have consistently paid your mortgage on time and have the income to qualify.
[Read: Best Home Equity Loans.]
Can You Refinance With a 500 Credit Score?
With a 500 credit score, you might be able to refinance, Jeanette says, but may have to work extra hard to find a lender willing to make a loan.
An FHA refinance loan could be your best option, but you may also need to research other borrowing options, including nonqualified mortgages. These loans don't adhere to the guidelines for qualifying mortgages established by the Consumer Financial Protection Bureau.
The loans can help people qualify who might not otherwise: those with credit issues or those who earn a nontraditional income, such as self-employed borrowers. You could qualify for a refinance loan, for example, using bank statements rather than W-2 forms as proof of income.
The trade-off is that borrowers will typically pay higher interest rates on nonqualified mortgages compared with qualified mortgages.
But with tightened lending conditions, banks may deem applicants with credit scores below 600 too risky right now, Jeanette says.
What Is the Minimum Credit Score for a Cash-Out Refinance?
The credit score requirements for a cash-out refinance usually aren't that different from a standard refinance, Jeanette says.
At the same time, a cash-out refinance loan may charge a higher interest rate compared with a standard refinance loan. Lenders can also view cash-out refinancing as higher risk than standard refinancing because you're increasing the amount you have to pay back.
With cash-out refinancing, borrowers should also pay attention to the amount of equity that can be accessed. Lenders may allow you to borrow 80% of your home's value, depending on your credit and income.
[Read: Best FHA Loans.]
How Do You Refinance a Mortgage With Bad Credit?
Even with bad credit, now is a good time to try to refinance because of low interest rates, according to DiBugnara. The Federal Reserve cut its key interest rate to near zero in March, which paved the way for record-low mortgage rates.
If you're trying to refinance a mortgage with bad credit, here are a few tips to keep in mind:
-- Check your credit. If you haven't reviewed your credit reports and scores recently, take time to see where you stand. The three major credit bureaus are offering weekly online reports through April 2021 at AnnualCreditReport.com. This can give you an idea of whether you lean more toward the poor credit or the fair credit range, which can influence your refinancing options.
-- Review your income and savings. Growing your emergency fund and your income, or keeping it stable at the very least, can make you seem less risky to a lender. That's especially true as millions of Americans have lost jobs or wages during the pandemic.
-- Decide whether a conventional or cash-out refinance is better. If you have built up home equity, a cash-out refinance may be tempting. But first consider whether pulling out your equity makes sense and how that may affect your refinance loan terms and repayment. Bad credit could mean paying a high interest rate and make a cash-out refinance more costly than it's worth.
-- Compare refinance rates. Rate shopping can help you find the best rate for a refinance loan, even with bad credit. While comparing rates, also consider the fees a lender may charge to refinance, which are similar if not identical to closing costs on a new mortgage.
-- Do the math on refinance savings. Refinancing to get a lower interest rate or payment sounds good, but consider whether it's worthwhile. If you've paid off a substantial part of your home loan or you plan to move in the next few years, refinancing now may not make the most sense.
-- Be prepared for the out-of-pocket costs. Refinancing a mortgage with bad credit means paying closing costs, unless those are rolled into the loan.
Finally, consider whether you might be able to delay financing to have time to improve your credit score. Paying bills on time each month and reducing your overall credit utilization could help to raise your score.
At the same time, keep older accounts open and limit applications for new credit.
By taking steps to boost your score, you could improve your odds of qualifying for a refinance loan at a lower rate.