Can I Refinance With Bad Credit? You normally don’t have to keep your mortgage if you’re unhappy with it. Your monthly payments may be reduced or you may save money on financing fees if you refinance. However, if your credit isn’t the best, you can be unsure of its value.

According to Diana Rice-Wilkerson, a senior loan officer with the Fairway Independent Mortgage Corp., “this is an exciting time to refinance, and most people will profit if they’re wanting to cut their monthly, pay off debt, make home upgrades, or even create an emergency fund.” And you shouldn’t hesitate to explore your refinancing objectives just because your credit score isn’t ideal.

How Credit Score Impacts Refinancing

The refinancing rates that a lender may give you depend on your credit score. Vantage scores below 661 and FICO credit scores below 670 are seen as less favorable for borrowing than higher credit scores.

However, other characteristics of specific loan types—primarily the amount of debt you may get and how much equity you need to have accrued in the property before you refinance—can also be influenced by your credit score.

For instance, if your credit score is lower, you might also need greater equity in your house or a lower debt-to-income (DTI) ratio in order to refinance a conventional mortgage.

Preparing To Refinance With Bad Credit

Generally speaking, establishing credit is a lengthy process that can take many years. But that doesn’t mean you couldn’t do something to improve your credit as much as you can before you submit a refinancing application. In some circumstances, you might notice a rise right away. What you should do is:

Reach Out to a Reputable Lender Early

“Since “poor credit” does not always equate to “unacceptable credit,” you should first see a lender to see if you qualify for a refinance. As an illustration, some people have poorer credit scores as a result of medical debt, bankruptcy, identity theft, or the repossession of a “lemon,” “added Rice-Wilkerson. “We can frequently find solutions to these problems.”

Check Your Credit Report and Credit Score

Always check your credit reports before applying for any type of credit. It’s not uncommon to find errors on them, some of which can even hurt your credit score.

Pay Down Existing Debt

Paying off whatever debt you have, especially credit card debt, is one thing you can do if you can to improve your credit score right away. The amount of debt you have, which accounts for 30% of your credit score, should be reduced.

Get Credit for Rent and Utilities

Your ability to manage things like your bank account and bill payments, which you may be quite adept at, is typically not taken into account when calculating your credit score. That marks a missed chance to establish credit. However, you may now add these accounts with tools like Experian Boost and UltraFICO, which might improve your credit score.

Ask Your Credit Card Issuers for Higher Limits

One factor that’s extremely crucial in this area, along with the amount you owe, is how much you owe in relation to your credit card limit, or how near you are to max out your credit cards.

This is known as your credit utilization rate, and by increasing your credit card limits, it looks like you’re borrowing a smaller amount of the credit you have available to you. 8 Just keep in mind not to exceed that new spending cap once again or you’ll find yourself back where you started, only with greater debt.

Get Help From a Certified Credit Counselor

Speaking to a credit counselor who has been approved by the National Foundation for Credit Counseling can be helpful if you’re having financial difficulties and aren’t sure where to start. Frequently, the help is free.

Shop for Rates

“Talk to various loan officers while doing your research. A mortgage may be offered to you, but it doesn’t necessarily mean it’s a good investment “explained Rice-Wilkerson. Find a loan officer you can rely on who works with candidates like yourself and proceed cautiously. To find lenders who can assist, you might also want to check with your state’s housing authority.

Choose a Lender and Complete Your Application

You can submit a comprehensive refinance application once you’ve identified a lender with whom you feel comfortable and who can provide the best rates.

Start Payments on Your New Mortgage

Like when you first obtained your mortgage, you will go to closing after being approved in order to sign the last documents. You’ll start making payments on your new loan after your new lender has paid off your old lender. Remember to sign up for autopay so you don’t have to worry about remembering to make your payments; this will help you build credit.

The Bottom Line

It’s true that if your credit isn’t great, you might not be able to refinance your mortgage at the cheapest rates. It’s still worthwhile to apply because you might still get a better rate or a cheaper payment than you do today. If anything, it will be simpler to make lower-cost payments, increasing your likelihood of continuing to develop credit over time.

Frequently Asked Questions (FAQs)