Refinancing Strategies When You Have Bad Credit

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ByChristopher Boston
Edited byVictoria Copans
ByChristopher Boston
Edited byVictoria Copans

Updated: December 27, 2023

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Even with a less-than-perfect credit score, it's possible to refinance your mortgage. Refinancing means replacing your existing mortgage with a new one, usually with better terms like a lower interest rate or a different loan duration. Homeowners often refinance to reduce their monthly payments, tap into home equity or switch from an adjustable-rate to a fixed-rate loan.

However, refinancing can be trickier and sometimes more costly if your credit score isn't great. That said, there are still pathways to refinance your mortgage with bad credit, including options from the FHA, VA or USDA.

Reasons to Refinance a Mortgage

A mortgage refinance is when you take out a new home loan to replace your current one. It can come with several perks, and it’s worth understanding these benefits because they can significantly impact your financial health. Here are some of the more common reasons to refinance your mortgage:


By considering these points, you can take control of your finances. Refinancing isn’t just about getting a new loan — it’s about reshaping your financial future to better suit your needs.

badCredit icon

A credit score is a number lenders use to decide how likely you are to repay a loan on time. A score below 580 is usually considered "bad." You may have a low score if you miss credit card payments, have debts in collections or take out too many loans. A low score can make it harder to refinance your mortgage because lenders may see you as a riskier borrower. However, it's not a dead end — there are ways to refinance and improve your score over time.

Refinancing Your Mortgage With Bad Credit

Even with a poor credit score, refinancing your mortgage remains within reach. Understanding the different strategies available allows you to make choices that could improve your financial situation through better loan terms and more manageable payments. Here are some strategies that might help you refinance a mortgage with bad credit — each of these is designed to work around credit challenges and help you move forward with your financial goals.

1. Approach Your Current Lender First

If you're looking to refinance your mortgage and your credit score isn't great, start by talking to your current lender. They already know you and may have options for refinancing that don't hinge on a high credit score. Sticking with the same lender could be easier since they have your payment history and might be more willing to work with you out of customer loyalty.

Before reaching out, gather your recent payment records, income details and any financial changes since your initial mortgage. Don't hesitate to ask if they have any special refinancing programs for borrowers with credit issues — they might have just the right plan for you.

2. Find a Non-Occupying Co-Client

After talking to your current lender, another step you can take to refinance a mortgage if you have bad credit is to team up with a non-occupying co-client. This person applies for the mortgage with you but doesn't live in the house. It's similar to having a co-signer.

Their good credit can boost your application by reassuring lenders that the mortgage payments will be covered. Choose someone you trust who understands that they're responsible for the loan if you can't make payments. This partnership can be a short-term fix, allowing you to refinance now and possibly refinance again on your own once your credit score goes up.

3. Refinance Using an FHA Loan

An FHA loan is a mortgage backed by the government, making it different from a regular home loan. It's designed for borrowers who might not have the best credit or a lot of money for a down payment. With an FHA loan, you can opt for a Streamline Refinance or a Rate and Term Refinance.

  • Streamline Refinance: This refinance option is for people who already have an FHA loan and want to lower their monthly payment or interest rate without a hassle. It's quick because it requires less paperwork and no credit check.

  • Rate and Term Refinance: This option lets you change your loan's interest rate or the time you have to pay it back. It's a good fit if your financial situation has changed since you got your original FHA loan.

Both of these refinance options help you stay in control of your mortgage payments, but knowing the differences can guide you to the one that matches your goals. They often have more lenient credit requirements, making it easier for you to get approved and get your finances back on track.

4. Consider VA Refinance Options

If you're a veteran or active service member, VA refinancing options might be your answer to refinance your mortgage with a bad credit score. This option is available to military members, veterans and sometimes their spouses. You can choose between two types: VA Interest Rate Reduction Refinance (Streamline Refinance) and VA Cash-Out Refinance.

Here's a side-by-side comparison:

Comparison Areas
VA Streamline Refinance
VA Cash-Out Refinance

Primary Purpose

Lower interest rate or change loan terms

Take cash out from your home’s equity

Credit Check Required

Usually not required


Appraisal Needed

Not always necessary


Lower fee, can be rolled into loan

Higher fee, can be financed

Documentation Requirements

Less documentation compared to other options

More extensive documentation required

VA loans are generally more forgiving when it comes to credit scores, making them a good fit if yours isn't on the low side. Remember, you'll need a certificate of eligibility for VA refinancing, which proves your service. By understanding the specifics of each option, you can choose the one that aligns best with your financial goals, whether it's reducing payments or accessing cash.

5. Explore the USDA Streamlined Assist Program

Another option worth considering is the USDA Streamlined Assist Program. It's designed to help homeowners in rural areas refinance their mortgages and is especially helpful if your current mortgage is a USDA loan.

One of the biggest benefits of the USDA Streamlined Assist Program is its simplicity. There's no credit review, so your credit score isn't a barrier. Also, there's often no need for a new appraisal of your home, which can save time and money. To qualify, you must currently have a USDA mortgage, and your home needs to be in an eligible rural area. However, this program has its limits. For instance, it only applies to properties in specific rural areas and to those who already have a USDA loan.

If you're interested and think you might qualify, reach out to a USDA-approved lender. They can help you through the application process and provide guidance regarding refinancing your mortgage via this program.

How to Improve Your Credit Before Refinancing Your Mortgage

Improving your credit score before applying for a refinance can make a big difference in terms of your chances of approval and the loan terms you get. Before you dive into refinancing, here are strategies to boost your score.

  • Pay Bills on Time: Your payment history is a major factor in your credit score. Late payments can stay on your credit report for up to seven years. Enroll in automatic payments or have a reminder system to ensure you're always on time.

  • Reduce Credit Card Balances: A high credit utilization ratio can negatively affect your score. Aim to keep your it below 30%. Paying off debt and keeping balances low will reflect positively on your credit report.

  • Avoid New Credit Applications: Each new application often requires a hard inquiry, which can lower your score slightly. Too many hard inquiries in a short time can signal financial distress to lenders. So, unless it's necessary, avoid applying for new credit cards or loans in the months leading up to refinancing.

  • Check Credit Reports for Errors: Inaccuracies on your credit report can unfairly lower your score. Obtain free reports from major credit bureaus and thoroughly review them. If you find errors, dispute them with the credit bureau.

  • Keep Old Accounts Open: Closing old credit accounts will impact your overall credit limit, which can, in turn, impact your credit utilization ratio. A higher credit utilization ratio will lower your score, so keeping older accounts open is generally a better move, even if you don't use them.

By adopting these habits, you can improve your credit and position yourself better for refinancing, saving you money in the long run.

FAQ About Refinancing a Mortgage With Bad Credit

MoneyGeek answered he most commonly asked questions about refinancing a mortgage with bad credit to provide clarity and additional information, helping you make informed decisions about your refinancing journey.

Can you refinance a mortgage with bad credit?
Will refinancing hurt my credit score?
Can I refinance immediately after closing on my house?
How can I improve my credit score before refinancing?
What are the costs associated with refinancing a mortgage?
How long does the refinancing process take?
Could refinancing with bad credit lead to higher interest rates?
Is it possible to refinance without a credit check?
How often can I refinance my mortgage?
Should I refinance with my current lender or look for a new one?

About Christopher Boston

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Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.