Introduction: Is Refinancing Possible with Bad Credit?
If you’re a U.S. homeowner with less-than-stellar credit, you might assume that refinancing your mortgage is off the table. Fortunately, that’s not always the case. While a low credit score can make refinancing more challenging, it doesn’t make it impossible.
Many lenders offer refinancing solutions specifically designed for borrowers with poor credit, especially if you have home equity or a government-backed loan. The key is to understand your options, prepare wisely, and choose a refinancing path that aligns with your financial goals.
This guide will walk you through everything you need to know about refinancing with bad credit in the U.S. in 2025—from eligibility and loan types to tips for improving approval odds and protecting your long-term finances.
Most mortgage lenders use the FICO credit scoring model, which ranges from 300 to 850. Here’s how it breaks down:
- 800–850: Exceptional
- 740–799: Very Good
- 670–739: Good
- 580–669: Fair
- 300–579: Poor
If your credit score is below 620, many conventional lenders will consider you a high-risk borrower. However, that doesn’t automatically disqualify you from refinancing. It just means you may need to:
- Explore government-backed loans
- Accept slightly higher interest rates
- Show strong equity or income to offset credit risk
Yes—you can refinance a mortgage even with poor credit, but your options may be more limited, and you’ll need to be strategic. Here are the main refinance routes available:
If your current mortgage is FHA-backed, you may qualify for an FHA Streamline Refinance—designed specifically for homeowners with lower credit scores.
Key Benefits:
- No credit check required (in many cases)
- No home appraisal
- Less documentation needed
- Lower upfront costs
Requirements:
- Must already have an FHA loan
- Must be current on payments
- Must show “net tangible benefit” (e.g., lower rate or payment)
For veterans, active-duty service members, or eligible surviving spouses with an existing VA loan, the VA IRRRL offers an easier refinance path.
Benefits:
- No credit check or appraisal
- Lower interest rate or monthly payment
- Streamlined paperwork
Requirements:
- Must already have a VA loan
- Must be current on mortgage
- No more than one late payment in the last year
If you need cash from your home equity and have a government-backed loan, cash-out refinance options still exist—though they’ll require full underwriting and credit checks.
FHA Cash-Out Requirements:
- Minimum credit score: 580 (some lenders may require 600–620)
- At least 20% equity after refinancing
- Full appraisal and income verification
VA Cash-Out Requirements:
- No official minimum credit score (lenders may set their own)
- Certificate of Eligibility (COE) required
- Strong credit history helps approval
Non-QM loans cater to borrowers who don’t meet traditional loan guidelines—such as self-employed individuals or those with poor credit.
Pros:
- Flexible underwriting
- Allows credit scores below 620
- May allow bank statements instead of W-2s
Cons:
- Higher interest rates
- Larger down payment or equity required
- Limited lender availability
Borrowers with poor credit typically receive higher interest rates, increasing the long-term cost of refinancing.
You may face stricter underwriting, require higher income, or need to show more equity to qualify.
Some lenders may charge origination fees, discount points, or rate lock fees to offset risk.
Not all lenders offer bad credit refinance programs—so your lender pool may be smaller.
Even with bad credit, you can take steps to strengthen your refinance application and potentially improve your loan terms.
A small credit score improvement can make a big difference in your rate and approval odds.
Quick tips:
- Pay down credit card balances
- Make on-time payments
- Avoid new credit inquiries
- Dispute any errors on your credit report
Even a 30-point boost can shift you into a better credit tier.
The more equity you have, the more confident lenders will feel.
How to build equity faster:
- Pay extra on your principal each month
- Increase your home’s value through upgrades or renovations
- Wait for home appreciation
Aim for at least 20% equity for the best refinance opportunities.
Adding a co-signer or co-borrower with better credit can help you qualify for a better loan.
Note: Both credit profiles will be considered, so the stronger the co-borrower, the more likely you’ll be approved.
Even if your credit is low, showing consistent and reliable income can help offset risk in the lender’s eyes.
Be prepared to provide:
- Pay stubs or W-2s
- Bank statements
- Employment history
- Tax returns (especially if self-employed)
A broker can connect you with lenders who specialize in bad credit refinance loans—saving you time and increasing your odds of approval.
Refinancing with bad credit can still make sense, but you must evaluate:
| Factor | Consideration |
|---|---|
| Monthly Payment | Will the refinance lower your monthly bills? |
| Loan Term | Can you switch to a shorter term and save on interest? |
| Cash Needs | Do you need cash for home repairs, emergencies, or debt? |
| Long-Term Plans | Will you stay in the home long enough to benefit? |
Current Mortgage:
- Balance: $240,000
- Rate: 7.25%
- Term: 30 years
- Monthly Payment: $1,640
Refinance Offer with Bad Credit:
- New Rate: 6.25%
- Closing Costs: $6,000
- New Monthly Payment: $1,480
- Monthly Savings: $160
- Break-Even: ~38 months
Even with a slightly higher rate than prime borrowers, this homeowner still saves over $50,000 in interest over 30 years.
Refinancing may not be the right move if:
- You plan to move or sell within 2–3 years
- The interest rate isn’t significantly lower than your current one
- You can’t afford the closing costs
- Your new loan adds PMI or other fees
- Your credit is so poor that offers have predatory terms
Always read your loan documents carefully and consult a housing counselor or financial advisor before signing.
- Shop around. Even with poor credit, don’t settle for the first offer. Rates and fees vary.
- Calculate your break-even point. Know how long it will take to recover refinancing costs.
- Beware of scams. Avoid companies that promise guaranteed approval for a fee or push too-good-to-be-true deals.
- Ask about alternatives. A home equity loan or HELOC may offer better terms, depending on your situation.
While refinancing with bad credit isn’t easy, it’s far from impossible. Thanks to FHA, VA, and non-QM loans, many U.S. homeowners with low credit scores still find opportunities to lower payments, reduce interest, or access equity.