Is it Possible to Refinance a Mortgage with a Bad Credit Score?

poor credit refinance

Is it possible to refinance a mortgage with a low credit score?

Answer: Yes.

The downside, however, is that you will receive high interest rates and otherwise undesirable terms for the mortgage. Before thinking about refinancing or purchasing a mortgage, you should find out what your credit score is and research typical refinancing rates for a credit score like yours. In January of 2017, 72.13% of people who refinanced their mortgages had a credit score of 700 or higher and another 17.69% had credit scores above 650.

Here is a basic overview of how your credit will affect mortgage eligibility:

  • 750+
    • Borrowers in this range may experience a quick approval process and will be offered the lowest interest rates and best terms when getting a mortgage.
  • 700-749
    • Scores between this range are also very good and you will be offered lower interest rates with good terms. However, some additional costs will be charged to the borrowers within this credit range.
  • 650-699
    • In this range, you may not get the best mortgage rate, but you still can get favorable loan terms.
  • 600-649
    • If your FICO score falls in this range, it means that your credit is just fine. You probably can refinance a mortgage but you will receive high interest rate.
  • Below 600
    • Borrowers with a score below 600 are considered to be poor creditors with a high chance of defaulting on a loan. Even if you have the chance to get a mortgage, lenders will charge you very high interest rates.

There are many loan programs for those with lower credit scores:

  • FHA
    • The FHA’s minimum credit score is 580, but some FHA lenders will approve you with a score as low as 500.
  • VA
    • Although there are no official credit score limits, VA loans usually require a credit score of more than 620.
  • Conventional Loans
    • Conventional lenders generally set a minimum credit score around 620. The best interest rates typically go to those with a score of more than 740.
  • USDA
    • For easy approval on a USDA Home Loan, you must have a credit score of at least 640. However, for a manually underwritten loan, the minimum score is 600.
  • 203k Loan
    • The minimum credit requirement for the 203k loans is at least 620. If your score falls below that number, additional requirements need to be satisfied to apply for this loan.

If you have an FHA (Federal Housing Administration) loan, their streamline refinance program will help you refinance quickly and easily. Under the traditional refinance process, a period of 45-50 days is necessary, but through streamline refinance this is reduced to above 30 days. It doesn’t require a credit check, home appraisal, or employment/income verification. They can use the original purchase price for the home’s current value, even if the home’s value has declined since the purchase. The program is mainly used to help people avoid foreclosures. VA loans and USDA loans have similar streamline refinance programs that the borrowers can use.  

If you owe more money than your home is worth and you’re current on your payments, then you might be eligible to refinance through HARP (Home Affordable Refinance Program). You will have to act fast though, as HARP is set to expire on September 30, 2017. Homeowners must be up to date on their mortgage payments, limited to one late payment in the past 12 months and no late payments in the past 6 months. Your credit history will be checked, as well as proof of your employment and income, but there is no minimum credit score requirement. To qualify for a refinance through HARP your loan must be owned by Fannie Mae or Freddie Mac, and your loan must be from before May 31, 2009.