How to refinance your mortgage with bad credit

Your credit score gives mortgage lenders a sense of how likely you are to make regular, on-time payments — so, it's a critical part of the approval process for refinancing.

The average rejection rate for mortgage refinance applications jumped to a record high of 25.6% in 2024 and is expected to be even higher for 2025. Falling credit scores are a major culprit — lenders typically want to see a 620 FICO score — but there are alternatives if you don't meet that threshold.

The first step if you want to refinance is to see what options you have with your current lender. They may allow you to modify your rate or recast your mortgage without refinancing.

Your current lender may also be more forgiving of a lower credit score if they've seen that you've made regular mortgage payments so far.

If that's not an option and you want to get a lower rate, adjust your terms or shrink your monthly mortgage payments; there are ways to refinance with poor credit.

The Federal Housing Administration (FHA) offers several refinancing options, including some for those with conventional mortgages.

Borrowers with existing FHA loans can refinance with an FHA Streamline Refinance and get better rates or terms. You must be at least 210 days out from closing on your existing loan and demonstrate that you have made on-time payments. There is no credit score or equity requirement for an FHA Streamline Refinance but borrowers must show that their new monthly rate will be lower.

An FHA Simple Refinance allows you to defer closing costs by rolling them into the mortgage and paying them back over the loan term. But it has stricter qualifications: Borrowers need a 580 credit score and 3.5% in home equity.

Borrowers with a conventional loan can also turn it into an FHA cash-out refinance with only a 580 credit score, 15% equity and a maximum debt-to-income ratio of 43%.

Rocket Mortgage and LoanDepot both offer all three types of FHA refinancing.

If you have a VA loan or USDA loan, you can refinance with no minimum credit score or home equity requirements.

Navy Federal Credit Union and Veterans United offer VA Interest Rate Reduction Refinance Loan (IRRRL) refinancing to veterans and active military personnel.

If you have a USDA loan, USDA Streamline Assist Refinancing has more flexible credit score requirements with no appraisal or home inspection. The loan must be at least 365 days old and payments must have been on time for at least six months.

While it doesn't offer USDA purchase loans, Pennymac does offer USDA Streamline Assist Refinancing nationwide.

Government-backed mortgage providers Fannie Mae and Freddie Mac have rate-and-term refinancing for homeowners with weak credit: If you make 100% of the area median income or less, you may qualify for Fannie Mae's RefiNow or Freddie Mac's Refi Possible.

In addition to flexible credit requirements, they accept debt-to-income ratios of 65%, much higher than most lenders. Your existing mortgage must have been signed at least one year ago, however

Because they don't have to follow Consumer Financial Protection Bureau guidelines, non-qualifying (or non-QM) mortgages have more flexible credit score requirements.

But they have higher mortgage rates — two points higher than traditional mortgages, in many cases. So, non-QM refinancing isn't a good option if your goal is to get a lower rate.

If those options don't work, you can ask a friend or family member to co-sign the new loan. If they have good credit it can greatly increase your chances of approval.

Co-signing will impact their credit score and debt-to-income ratio, as well, however. And while they have no legal claim on the property, they're responsible for the debt if you fail to make payments.

If you're struggling to get refinancing due to bad credit, a loan officer with experience in community development may be able to help.

They'll review your credit report and identify how to improve your credit within 30 days. Once that's accomplished, they'll do a "rapid rescore" and submit proof of your improved credit file directly to the three credit bureaus.

Community loan officers can also help you understand the mortgage programs available to you so you're comfortable with the terms of your loan.

To find a community loan officer, first check with your area banks and credit unions. You can also reach out to Community Lending of America or the Opportunity Finance Network. These are Community Development Financial Institutions dedicated to promoting economic development in underserved communities and likely have loan officers who specialize in community development loans.

Of course, you can always pause your search for refinancing and work on improving your credit score. Over the course of a year, making on-time payments, keeping your credit utilization rate under 10% and paying off debt can raise your credit score by 100 points.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice to help them make informed financial decisions. Every mortgage article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of mortgage products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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