Doing a refinance on your mortgage with bad credit score can be a challenge, but it’s not impossible. There are many benefits to tapping into your home’s equity, and it isn’t just restricted to borrowers with flawless credit. 

Today we cover everything you need to know about getting approved for a mortgage refinance with bad credit. 

Can you get refinance your mortgage with bad credit?

The short answer is yes. 

But there are a lot of caveats that come along with that, and conditions that need to be met. 

There are 3 Programs that allow you to refinance your mortgage with Bad Credit

1. FHA Loan
2. VA Loan
3. Non-QM Loan or Portfolio Loan 

This is for primary residence only. 

FHA Loan | Refinance Mortgage with Bad Credit

This is probably the most popular, and most available way to go when refinancing with with bad credit.

Why is FHA a popular option?

FHA offers competitive rates, and has some of the most flexible underwriting guidelines that you’ll find in terms of credit, debt to income ratio, and loan to value ratio. 

If you’re below 640 score, the rates aren’t quite as good. But what’s nice about FHA, is that you can apply for a streamline refinance down the line, when your credit score improves. 

This gives you the opportunity to accomplish your cash out refinance goals now, and then do a simple streamline once you’re back on your feet (in 6-7 months).  

Things to keep in mind:

• 500 credit score minimum
• Borrow up to 80% of your home value
• No accounts in dispute on credit
• Must not have any 30 day late payments on any mortgage in the last 12 months
• Borrower must have owned and occupied subject property for at least 12 months prior to application

In addition, must be within your county loan limits. Check loan limits here. 

An FHA loan is a great route to take if you have low credit, and are looking to refinance your home. 

VA Loan | Refinance Mortgage with Bad Credit

To all the US armed forces veterans of this great nation, thank you for your service to our country. Semper Fidelis

Eligible veterans are able to tap into their home equity to up to 90% of their home value. 

For some reason there is a misconception among many veterans that you can only use your VA loan benefit once. 

That is absolutely not true. You can use your VA loan benefit as many times as you’d like, as long as you have available entitlement. Check your entitlement here. 

What’s even more amazing is that, similar to FHA, you can apply for a streamline refinance (VA interest rate reduction loan) once you get back on your feet and get your scores up. 

Things to keep in mind:

• 500 credit score minimum
• Borrow up to 90% of your home value
• Free and clear properties are not permitted
• Must have at made least 6 months payments on current mortgage
• No 30 day late payments in the last 12 months
• Primary residence only

A VA cash out refinance is a wonderful way for our nation’s veterans to accomplish their home ownership goals. 

Non-QM Loan | Refinance Mortgage with Bad Credit

Prior to March 2020, these alternative loan types were available as low as 500 score. 

Currently, these Non-QM loans (or portfolio loans) are an available option as low as 550 credit score. I have no doubt they will lower back down to 500 at some point, and will update when this happens. 

For this type of loan you can expect lower loan to value ratio requirements, and rates on the higher side. 

But there are some major benefits to a non-QM loan that you won’t find on FHA or VA, including:

• Multiple 30 day late payments on mortgage in the last 12 months is okay
• Bankruptcy in the last 24 months is okay
• Foreclosure in the last 24 months is okay

A non-QM loan is a short term fix, for short term circumstances. It’s a perfect way to accomplish your homeownership goals now, and then refinance into something more traditional once your credit improves. 

Why do a cash out refinance?

Here are some benefits when doing cash out on a refinance mortgage with bad credit.

Debt consolidation – Use the current equity in your home to consolidate unsecured debt like high interest credit cards and personal loans.

By paying your revolving debt down, your credit score will increase over time if you keep the available balance below 30%.

Consolidating your debt into the mortgage often saves borrowers hundred of dollars a month, and has a major positive impact on the household budget. 

Home improvement – If you have been putting off getting things in order around the house because of high expense, a cash out refinance is a perfect opportunity to accomplish your home improvement goals. 

But if the home is in major disrepair, the appraiser will likely mark the repairs needed prior to closing. 

Pay off derogatory debt – Having delinquent debt lingering on your credit for years can weigh heavily on the conscience, and limits your options when seeking financing of any kind. 

A cash out refinance is a great way to get a fresh start and pay off collections, tax liens, and judgments. 

Bonus Tip | Recent Forbearance

If you have any mortgage that has been in forbearance in the last 12 months, be sure to disclose that up front when you apply.

Not all lenders treat a recent forbearance the same, and not all lenders report the forbearnce the same on credit and title.

If you currently have an FHA loan, and you had the loan in forbearance, there is a strong liklihood that the payments that you deferred were put into a 2nd lien.

This 2nd lien will need to be paid off with the loan when you refinance (or sell).

It’s important that you give a heads up that there was a mortgage in forbearance so that we can do the necessary research to figure out which option will make the most sense.

You don’t want to be a few weeks in process, and then have to sort out how to handle the recent forbearance. The sooner that is identified, the better.

In Summary

Getting approved for a refinance mortgage with bad credit is possible in many scenarios. 

It’s extremely important to work with a lender that is highly experienced with these types of loans. 

The best options for low credit cash out refinance are:

• FHA Loan
• VA Loan
• Non-QM loan

Find out which option would work for your scenario. 

I invite you to reach out.

Get your questions answered. 

We have been able to help many borrowers all over the country get approved when other lenders said it wasn’t possible. 

Reach out to see if we can accomplish your goals. And if for some reason we can’t, we’ll absolutely do our very best to point you in the right direction to set you up for success.