Refinancing a mortgage is almost assuredly going to be more difficult with a low credit score, but it may be possible if you’re willing to go the extra mile. Credit requirements are highly dependent on the individual lender and type of refinance, so you may need to shop around. The best candidates for refinancing are going to be government-backed mortgages.

General Strategies

• Get quotes from your current mortgage servicer and at least two other lenders. 
• Submit all your applications within a two-week period to ensure that the inquiries count as only a single inquiry with the three credit reporting agencies. 
• Work on rebuilding your credit if you can’t qualify for a refinance at the present time.

FHA Options

Mortgage refinances that are insured by the Federal Housing Administration (FHA) have less stringent credit requirements than conventional mortgages. FHA refinance options include a streamline refinance, rate-and-term refinance, and cash-out refinance. To be considered for an FHA refinance, your current mortgage must be an FHA loan and you must be current on payments. 

Streamline refinances come in two options: credit-qualifying and non-credit-qualifying. A credit-qualifying refinance requires a minimum credit score of 580, whereas a non-credit-qualifying refinance doesn’t require a minimum credit score or maximum debt-to-income (DTI) ratio. As one might expect, a non-credit-qualifying refinance has a higher interest rate than a credit-qualifying refinance to compensate the lender for the additional risk of taking on a non-credit-qualifying borrower.

A rate-and-term FHA refinance allows you to change the interest rate and duration, or term, of your current FHA mortgage. The lender still requires a minimum credit score of 580, depending on your DTI ratio.

A cash-out refinance replaces your existing FHA mortgage with a larger mortgage and gives you the difference in cash. The size of this new loan is based on your home equity. Currently, borrowers will need at least 20 percent equity in the property based on a new appraisal. While the FHA requires a minimum credit score of 580, many FHA lenders require a higher score for a cash-out refinance, so it is best to shop around.

VA Options

VA refinance loans include streamline refinance and cash-out refinances. The U.S. Department of Veterans Affairs guarantees these loans for military service members on active duty, veterans, and their eligible surviving spouses. The VA doesn’t require a minimum credit score, but individual lenders could require a score as high as 660.

A VA streamline refinance can allow you to get a lower interest rate or change from a variable to a fixed rate of interest. The VA doesn’t require a new credit check or appraisal for this type of refinance, although your lender might.

A VA cash-out refinance also allows you to change the interest rate or switch from a variable to a fixed rate. The VA also will allow eligible borrowers with a non-VA loan to transition into a VA loan through a cash-out refinance. To be eligible for a cash-out refinance, the VA requires borrowers to meet three requirements: They must qualify for a VA-backed home loan Certificate of Eligibility; they must meet VA’s—and their lender’s—standards for credit, income, and any other requirements; and they must live in the home they are refinancing with the loan.

USDA Options

The United States Department of Agriculture (USDA) backs mortgages used to buy homes in designated rural areas. Homeowners with USDA-backed mortgages have the option of a streamlined refinance, without the need for a credit check, DTI calculation, or home appraisal. However, you must be current on your mortgage payments for at least the last year.

Key Takeaways

Are you looking to refinance your mortgage with a low credit score? While it can feel impossible, there are options available to you. Talk to a financial advisor to figure out what would work best for your situation.