How refinancing works with poor credit
Refinancing means replacing your current mortgage with a new one, often to secure better terms such as a lower interest rate, reduced monthly mortgage payments or a shorter loan term. The process is much like getting your original mortgage: you’ll choose a lender, submit financial documents and review a loan estimate before moving forward (for a deeper dive into the full process, check out our guide to refinancing).
As part of the approval process, lenders look at several factors, including your credit score, income, debt-to-income ratio and how much equity you have in your home. In general, a credit score below 620 is considered too low to qualify for most conventional loans. However, there are options such as FHA loans, VA loans and USDA loans that are more flexible for borrowers with lower scores.
A less-than-ideal score doesn’t automatically take refinancing off the table. If you’ve consistently made your mortgage payments, improved your overall financial picture, reduced your credit card debt or built equity since buying your home, you may still be eligible—especially through programs tailored to credit-challenged borrowers. Some lenders even offer bad credit mortgage refinance options that account for your closing costs and help to lower long-term expenses.
Your credit score doesn’t tell the whole story. Lenders also consider your equity, income and how consistently you’ve made mortgage payments.
Options for homeowners with bad credit
A credit score below 620 can make traditional refinancing more challenging, but it doesn’t shut you out. Several programs are designed to work with lower scores, alternative documentation or unique financial situations.
| Loan Type | Who It’s For | Key Features & Trade-Offs |
|---|---|---|
| FHA Streamline Refinance | Homeowners with an existing FHA loan (typically ~580+) | No appraisal, minimal paperwork and flexible credit rules. Must already have an FHA loan; mortgage insurance may apply. |
| VA IRRRL | Veterans, active-duty service members or eligible spouses with a VA loan | Often, no credit check or income verification; low funding fee. Must already have a VA loan; small closing costs still apply. |
| Fannie Mae RefiNow / Freddie Mac Refi Possible | Low- to moderate-income borrowers with conventional loans | Reduced fees, lower rates and more credit flexibility. Income limits and recent payment history requirements apply. |
| Non-Qualified Mortgage Loans | Borrowers with unique income sources or damaged credit | Accepts alternative documentation like bank statements. Higher rates and fees; fewer lenders offer them. |
Requirements and terms vary by program/lender and are subject to change.
Tips to improve your approval odds
Even if your credit score isn’t where you want it to be, a few proactive steps can make a difference.
- Check your credit reports. Spot and dispute errors or outdated information that may be dragging down your score.
- Pay down credit card balances. This lowers your debt-to-income ratio and can give your score a small boost.
- Consider a co-borrower. A partner or family member with stronger credit can strengthen your application and help you lock in better terms.
- Talk to the right lenders. Some lenders specialize in helping borrowers with credit challenges and may offer more flexible programs or documentation options. Start with your current lender if you’ve built a strong payment history.
Pros and cons of refinancing with bad credit
Refinancing with a low credit score isn’t always easy, but it can still be worth exploring. As with any major mortgage decision, it’s important to weigh the benefits against the costs before you pull the trigger.
Here’s a snapshot of what to expect:
Pros & Cons of Refinancing with Bad Credit
| Pros | Cons |
|---|---|
| Lower monthly payments: Refinancing can reduce your monthly costs by extending your loan term or securing a better rate. | Higher interest rates: Borrowers with lower credit scores often face higher rates, which can limit total savings. |
| Switch to fixed-rate loans: Moving from an adjustable-rate mortgage (ARM) to a fixed rate offers more predictable payments and stability. | Limited loan options: Fewer lenders work with credit-challenged borrowers, which may narrow your choices. |
| Access to home equity: If you’ve built equity, refinancing can free up cash for debt consolidation or other needs. | Potentially higher fees: Closing costs, mortgage insurance or discount points may be higher with a lower credit profile. |
Not sure if refinancing is right for you? Try our Mortgage Refinance Calculator to run the numbers.
When does refinancing make sense?
Refinancing isn’t only about chasing the lowest rate. It can be a strategic move to create more breathing room in your budget, gain payment stability or tap into equity for important expenses.
It can also play a role in rebuilding credit. By managing your new loan responsibly and making on-time payments, you show lenders you’re a lower risk. Over time, that track record can help boost your credit score, unlocking better terms and more opportunities down the road.
