How to Refinance Your Mortgage Loan When You Have Bad Credit

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Before pulling the trigger on a mortgage refinance, it’s smart to check your credit and determine whether you are considered an attractive borrowing candidate. That’s because having a poor credit score and red flags on your credit report can make refinancing more challenging and costly – even if you are approved by a lender.

“Bad credit” is often considered having a FICO credit score below 580. Some lenders even categorize credit as “bad” or “poor” if your score is lower than 620. Fortunately, you may still qualify for a mortgage refi even if you have bad/poor credit.

But you should expect to pay more for financing and anticipate possibly a lengthier and more involved process.

Your Current Credit Score Matters

Baruch Silvermann, a financial expert and CEO of The Smart Investor, explains that those with good credit scores (670 or higher) are usually quoted a lower interest fixed interest rate on a mortgage refinance loan than those with poor credit scores. 

“That can mean the difference, for example, between getting a rate below about 6.5% on a 30-year fixed-rate refi loan versus a rate well above 7%,” he says. That rate difference can equate to thousands extra paid in mortgage interest over the life of the loan.

Dennis Shirshikov, head of growth for and a finance and economics professor at the City University of New York, cautions that pursuing a mortgage refinance when you have bad credit can be extra challenging in other ways, too.

“Lenders perceive you as a higher risk. You may need to provide more documentation and prove a stable income. Expect a possibly longer underwriting and closing process, too,” he adds.

The best candidates for refinancing include those with a preferred credit score, a solid employment history, steady earnings, and ample reserves in the bank. 

Why a Refi May Be Needed

“In this climate, nearly all refinances today are cash-out refis where borrowers are tapping into their equity to pay for home improvements or consolidate debt, or loans where a borrower is forced to refinance due to a divorce, job loss, or financial necessity,” notes Mason Whitehead, a Dallas-based branch manager for Churchill Mortgage. “Others are choosing to refinance from an adjustable-rate mortgage (ARM) to a long-term, fixed-rate mortgage to prevent paying more in interest because the rate fluctuates with an ARM.”

Another instance where a refi may be worth it is to switch from a fixed-rate loan to an ARM that offers a fixed-rate period (usually the first year, three years, or five years), after which time the rate can go up or down; you may be able to pay less during that fixed-rate phase, following which you can perhaps sell your home or refinance again, back to a new fixed-rate mortgage.

Very few borrowers nowadays are opting for rate-and-term refinances (without taking cash out) because it’s highly unlikely you can get a lower fixed interest rate than what they are currently paying on their existing mortgage. 

But regardless of the scenario, you can count on paying more to refinance and experiencing more red tape if your credit is weak.

Ways to Improve Your Credit for a Potential Refinance

Ideally, it’s best to work hard at upping your credit score and improving your credit rating many weeks before applying for a mortgage refinance loan, which can result in a smoother process and lower total costs. Try these strategies:

  • Review your three free credit reports. “Check for errors or inaccuracies you see on your reports, and dispute any errors with Experian, TransUnion, and Equifax,” suggests Silvermann. 
  • Pay your bills punctually. Establish a solid track record of paying your debts on time, every time. 
  • Try to repay your debts in full, or at least pay more than just the minimum amount due every month. “Paying down debt can have an immediate positive impact on credit utilization, which is the second most significant factor in determining your credit score,” Silvermann adds. 
  • Avoid applying for any new credit before applying for your mortgage refi.
  • Request a higher credit limit from your credit card company or another creditor.
  • Don’t overspend or max out on your credit limit. “Keeping your balance below 50% of your credit limit – ideally 33% – is extremely important. If you exceed 50% of the limit on your credit card, for example, it will hurt your credit score – even if you pay your bill on time,” suggests Whitehead.

Next Steps: Compare Current Refi Rates from Lenders

When it’s time to shop your refi options, evaluate several factors before committing to a refinance loan.

“Carefully consider the total loan costs, the impact on your long-term financial goals, and the potential for future rate increases if you opt for an adjustable-rate mortgage, as well as the possibility of rates lowering soon if you prefer a fixed-rate mortgage,” recommends Shirshikov.

Additionally, shop around and compare loan offers from several different lenders.

“Comparing rates from multiple lenders can help you find the best possible deal on your mortgage refinance, even if you have bad credit,” Silvermann says. “Even a small difference in the interest rate can have a significant impact on your monthly payments and overall interest costs.”

Erik J. Martin

Erik J. Martin is a Chicago area-based freelance writer and public relations expert whose articles have been featured in AARP The Magazine, Reader’s Digest, The Costco Connection, Bankrate, Forbes Advisor, The Chicago Tribune, and other publications. He often writes on topics related to real estate, personal finance, technology, health care, insurance, and entertainment. He also publishes several blogs, including and, and hosts the Cineversary podcast (

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