Yes, you can refinance with bad credit, but you'll pay more and have fewer lenders willing to work with you

Refinancing with a credit score below 620 is possible, but the terms will be worse than what someone with good credit receives. Most conventional lenders set a floor around 580 to 620, though some will go lower. The trade-off is real: you'll see higher interest rates, larger down payments, stricter income verification, and higher closing costs. Some lenders specialise in bad-credit refinancing specifically, but they charge accordingly.

The reason lenders tighten terms for lower credit scores is straightforward: your credit history shows you've missed payments, carried high balances, or defaulted before. A lender sees that as a sign you might do it again. They price that risk into the loan by charging you more.

Whether refinancing makes sense depends on why you're considering it. If you're trying to lower your monthly payment, a bad-credit refinance might not help—the higher rate could cancel out any savings. If you're trying to tap home equity or consolidate debt, the math might work, but you need to calculate it carefully before you explore.

Key Takeaways

  • Most lenders will refinance with a credit score between 580 and 620, but rates will be 1 to 3 percentage points higher than conventional loans.
  • FHA loans allow credit scores as low as 500 in some cases and may be cheaper than subprime conventional refinances, though they carry mortgage insurance.
  • You'll need to document income more thoroughly and may need to put down 10 to 20 percent of your home's value as a down payment.
  • Paying down existing debt or waiting a few months for recent negative marks to age can sometimes lower your rate more than refinancing when ready.

What credit score you actually need to refinance

The minimum credit score for a conventional refinance is typically 580 to 620, depending on the lender. Some lenders advertise they'll work with scores as low as 500, but those come with rates so high that the loan often doesn't pencil out financially. A score in the 620 to 640 range is more realistic if you want a rate that's only moderately worse than prime lending.

Credit score is not the only thing lenders look at. They also examine your recent payment history—how many late payments you've had in the last two years, whether you've had a foreclosure or short sale, and how long ago those events occurred. A single 30-day late payment five years ago affects you less than a recent one. A foreclosure that closed three years ago is still a major red flag.

FHA refinances have different rules. The FHA Streamline program (for borrowers who already have an FHA loan) doesn't require a credit check at all, though you do need to be current on your existing loan. A standard FHA refinance typically requires a 580 credit score minimum, though some lenders will go lower if you have compensating factors—like a large down payment or very stable income.

How much higher your interest rate will be

A borrower with a 750 credit score might get a 30-year fixed refinance at 6.5 percent. A borrower with a 620 score on the same loan might see 8.5 to 9.5 percent. That 2 to 3 percentage point difference adds up fast: on a $300,000 loan, it means roughly $200 to $300 more per month in payments.

The exact rate depends on the lender, the loan type, your down payment, and current market conditions. Subprime lenders (those specialising in bad-credit loans) typically charge more than banks or credit unions. Online lenders sometimes undercut them, but you need to compare actual offers, not advertised rates.

Before you refinance, calculate whether the new payment is actually lower than your current one. If you're refinancing a 7 percent loan into a 9 percent loan, you're probably making your situation worse, even if the new loan has a longer term. Use a mortgage calculator and plug in real numbers from actual loan offers.

Down payment and cash-out limits with bad credit

A conventional refinance with good credit often requires no down payment (a cash-out refinance) or just 5 percent (a rate-and-term refinance). With bad credit, expect to put down 10 to 20 percent of your home's current value. Some lenders will go lower, but the rate penalty increases.

Cash-out refinancing—borrowing more than you owe to pull equity out—is harder with bad credit. Many lenders won't allow it at all. Those who do typically limit you to 70 to 80 percent of your home's equity, versus 85 to 90 percent for borrowers with good credit. If you need cash, a home equity line of credit or a second mortgage might be cheaper than a cash-out refinance at a subprime rate.

The down payment requirement exists because lenders want to reduce their loss if you default. If you have 20 percent equity in the home, the lender's risk is lower. It's a way of saying: prove you have skin in the game.

FHA Streamline versus conventional bad-credit refinancing

If you already have an FHA loan, the FHA Streamline program is often the cheapest path, even with bad credit. Streamline refinances don't require a new appraisal, don't require income verification, and don't require a credit check. You just need to be current on your existing loan and show that the new loan saves you money (usually at least $50 per month).

The catch is mortgage insurance. FHA loans require an upfront mortgage insurance premium (1.75 percent of the loan amount, rolled into the loan) and an annual premium (0.55 percent of the loan balance per year for most borrowers). If you're refinancing to lower your payment, Streamline can still work, but the insurance costs eat into your savings.

If you don't have an FHA loan, a standard FHA refinance requires a 580 credit score minimum and a new appraisal. It's usually cheaper than a subprime conventional loan, but you're still paying for mortgage insurance. Compare the total cost—rate plus insurance—against a conventional bad-credit offer before you decide.

Income verification and debt-to-income ratio

Lenders verify income more strictly with bad-credit borrowers. You'll need recent pay stubs, W-2s, and possibly tax returns. If you're self-employed, expect to provide two years of tax returns and possibly a profit-and-loss statement. If you've changed jobs recently, you may need a letter from your employer confirming your position and salary.

Your debt-to-income ratio (total monthly debt payments divided by gross monthly income) has a tighter ceiling with bad credit. Conventional lenders typically allow up to 43 to 50 percent for borrowers with good credit. With bad credit, that limit often drops to 40 to 43 percent. If your ratio is too high, you won't be approved, even if you have enough home equity.

Some lenders will approve you if you pay down existing debt first—credit cards, car loans, or personal loans. Paying off $5,000 in credit card debt can lower your ratio enough to may have access to. It's worth asking the lender what your target ratio needs to be and whether paying down debt would help.

Waiting versus refinancing now: when to hold off

If you have a recent late payment (within the last 12 months), waiting can save you money. Each month that passes makes the late payment older and less damaging to your score. A 30-day late from six months ago hurts less than one from last month. Waiting 12 to 24 months after a late payment can lower your rate by 0.5 to 1 percent.

If you're currently behind on your mortgage, you cannot refinance until you're current. Bring the loan up to date first, then wait at least two to three months before explore. Lenders want to see that you've stabilised.

If your credit score is just below a lender's threshold (say, 615 when they want 620), paying down credit card balances can raise your score by 10 to 30 points in a few months. This is often faster and cheaper than refinancing at a higher rate. Check your credit report for errors—sometimes a dispute can raise your score when ready.

Closing costs and fees to watch for

Bad-credit refinances carry higher closing costs. Expect to pay 2 to 5 percent of the loan amount in fees, versus 1 to 3 percent for a prime loan. That includes origination fees, appraisal fees, title insurance, and lender fees. Some lenders roll these into the loan balance (no cash out of pocket), but you're paying interest on them for 30 years.

Watch for inflated appraisal fees, processing fees, or "risk-based" fees that seem excessive. Get quotes from at least three lenders and compare the total cost, not just the interest rate. A lender with a slightly higher rate but lower fees might be cheaper overall.

Ask whether the lender will allow you to roll closing costs into the loan. If you don't have cash on hand, this is often necessary, but it means you're borrowing more and paying interest on the fees themselves.

Frequently Asked Questions

Will refinancing hurt my credit score?

Yes, temporarily. A hard inquiry and a new loan account will lower your score by 5 to 10 points initially. Your score typically recovers within a few months as you make on-time payments on the new loan. If you're shopping for rates, do all your applications within 14 to 45 days—multiple inquiries in a short window count as one inquiry for scoring purposes.

Can I refinance if I'm behind on my mortgage?

No. You must be current on your existing loan before any lender will refinance. If you're behind, contact your servicer about a loan modification or forbearance first. Once you're current and have made three to six on-time payments, you can explore to refinance.

What if I have a second mortgage or home equity line of credit?

You'll need to refinance or pay off the second lien before you can do a rate-and-term refinance on the first mortgage. Some lenders will allow a cash-out refinance that pays off both, but the rate will be higher and the down payment requirement larger. Ask the lender whether they can subordinate (lower the priority of) the second lien instead.

Is a bad-credit refinance worth it if my rate only drops by 0.5 percent?

Maybe. Calculate your break-even point: divide the closing costs by the monthly savings. If closing costs are $3,000 and you save $50 per month, break-even is 60 months. If you plan to stay in the home longer than that, it makes sense. If you might move or refinance again within five years, it probably doesn't.

What's the difference between a subprime lender and a bank?

Subprime lenders specialise in bad-credit loans and often have faster approval and less strict documentation. Banks and credit unions typically have lower rates but stricter credit requirements. Get quotes from both—sometimes a bank will approve you at a better rate than you expect, and sometimes a subprime lender's speed is worth the higher cost.