A mortgage refinance can help you to lower your rate and monthly payment, even if you have low credit scores, poor payment history, or simply upside down on your conventional mortgage loan. It also can get you cash to do renovations on your home if you want to do a cash out refinance.

However, some people are held back from refinancing because they have an underwater mortgage or because the lower credit scores prevent them from qualifying to refinance at all. Many borrowers with good credit want to secure a no cost refinance from the best conventional lenders offering competitive interest rates and terms.

What is a Conventional Refinance Mortgage?

A conventional or conforming refinance involves replacing your existing mortgage with a new mortgage that isn’t backed by a government agency.

To break it down: “Refinance” means you are substituting your current mortgage with a new one that better suits your current financial needs. The term “conventional” in this context indicates that the new loan does not have government backing, unlike VA, USDA and FHA mortgages.

You should consider a conventional refinance on any residential property you own, be it your primary residence, a second home, or an investment property.

How Long Do You Have to Wait to Refinance a Conventional Home Loan?

Here are the guidelines for refinancing conventional loans in 2024. Generally, you can refinance a conventional loan whenever you choose. However, you may need to wait six months if you plan to refinance with the same lender. This restriction does not apply if you choose to refinance through a different lender.

poor credit mortgage refinance

Get Approved for a Reasonable Conventional Mortgage Refinance with No Equity or Low Credit Scores

If you have a lower credit score, you could have difficulty getting the best interest rate.  Refinancing a conventional mortgage with no equity or damaged credit can be challenging but not impossible.  Start by working on boosting your credit score. Pay bills on time, reduce outstanding debts, and correct any errors on your credit report.

Fortunately, underwriting guidelines are not as strict as they were several years ago. It is possible to refinance your home with no equity and sometimes even with poor credit. Below are some options to consider.

#1 Work with Your Mortgage Lender

Some people say that you should always shop around for the best deal, and there is something to be said for that. But if you have poor credit and have been making your loan payments on time, your current lender may be willing to work with you even with a lower credit score. A lower score does not always torpedo your conventional mortgage refinance application as lenders will look closely at your loan to value ratio, debt to income ratio and your current income.

Also consider staying with your current lender if they offer a good rate and are able to approve you for a mortgage with poor credit. While rates have been rising in 2024, you still may be able to get a lower mortgage rate than you have today. If the company that current services your loan is reasonable in regards to offering you a refinance with bad credit, you should consider it.

#2 Look at Other Conventional Lenders that Offer Refinancing for Poor Credit

If your current mortgage lender is not giving you the best deal, consider shopping other lenders. Different lenders can offer different interest rates for similar programs. Why is this? Different lenders have different investors with various risk tolerances. Some investors may allow a lower interest rate for someone with a lower credit score. Some lenders may be more accustomed to working with people with lower scores. Yes there are lenders that even specialize in refinance mortgages for people with bad credit.

Experts say that shopping for a lower rate can have a major impact on what you pay over the loan’s life. It is possible to save at least 10% of your loan amount in interest with a refinance loan if you shop around. Even a difference of just .5% on the loan rate can save you tens of thousands of dollars over the life of the loan.

Many experts recommend people with lower credit scores try a local credit union to get a refinance. They often have lower interest rates than what is available at banks and traditional lenders.

#3 Try to Boost Your Credit Score

If your low credit score means you are getting mortgage refinance offers at a high rate, consider doing things to boost your score. Most conventional lenders want to see at least a 620 FICO score, but this may be at a higher interest rate.

Collect all of your credit reports and ensure there are no mistakes on them. If you have errors on the reports about a late payment, this could be weighing down your score. File a dispute and get that error corrected.

After you deal with any errors, try to pay down any credit card debt you have. While many people find this hard to do, there is no question this is one of the fastest ways to raise your credit score dramatically. It is possible to raise your score by 40 points or more by paying off credit cards. Learn how to buy a home with bad credit.

#4 Get a Mortgage Loan Co-Signer

If you have a cosigner on your mortgage loan refinance, you may be able to score a lower interest rate. Keep in mind that this person needs to have a good credit profile. Also, he or she will be on the hook financially if you do not pay the mortgage, so be sure that you are paying the bill on time. This is a major commitment for the cosigner, so it needs to be someone you are close to. Read the co-borrower eligibility for mortgage qualification.

#5 Consider a Streamline Refinance Loan

The Streamline Refinance program is recommended for borrowers that have underwater mortgages. This means that the borrower owes more on their mortgage than their home is worth. The Streamline program does not require an appraisal but you must mee the eligibility requirements.

The streamlines allow you to refinance a current FHA or VA Loan with minimal underwriting and little scrutiny of your credit and income. You also will have lower mortgage closing costs in some cases than you would have with a conventional refinance. These loans are actually made by private lenders, but the fact that you met VA or FHA home loan requirements for your first mortgage shows that you are still a reasonably safe bet, as long as you have paid your mortgage on time.  See how to apply for FHA loan online.

#6 Make Your Mortgage Application More Attractive

Having a poor credit score does not always sink your application on its own. The lender will also look at your bank statements, tax forms and income statements to make a lending decision. Having some cash in your savings account can help the lender to make a decision in your favor.

Now that you understand how you can get a mortgage refinance with poor credit, get going on applying; interest rates are on the way up and could hit 7% in 2024! Be Prepared and gather financial documents and be ready to explain any credit issues to the lender.

Is It a Good Time to Refinance My Mortgage if I Have Poor Credit?

As you see mortgage rates rising – with conventional refinance rates in mid-October, 2023 in the 6.75% range – you may wonder if you can refinance your mortgage to save money if you have poor credit. In some situations, it may still be possible to save money in this scenario with a refinance. Below is more information.

Overview of Your Refinance Options for People with Poor or Damaged Credit

You have a few options to refinance your mortgage with poor credit. What exactly you want to accomplish with the refi will help you to choose with refi program is the best fit for you. There are refi programs whose primary focus is to get you a lower payment and rate, while others will help you to get the equity you need out of your home. We suggest that you shop around for conventional lenders have varying credit score requirements. Explore multiple lenders to find one that offers favorable terms for your situation.

FHA Refinance for Poor Credit

If you have an FHA loan and poor credit scores, you might be in luck. You may still qualify for an FHA-streamline refinance. This refinance program is suitable for those with a lower credit rating.

FHA will let you refinance into a lower rate mortgage without paying for a new appraisal, nor do you usually need a credit check or have to have your income verified again. You might be able to score a lower rate and monthly payment.

However, there are some criteria to qualify. A few lenders may require a 620-credit score. Others may allow for a lower score or will not check your credit at all. Also, your mortgage must be current, have no late payments over the past year, lender has to be approved by FHA to underwrite loans. You must have been in the home for a minimum of six months.

Home Equity and HELOC Loans

A home equity loan is a 2nd mortgage on your home that uses the built-up equity from your timely mortgage payments as well as any appreciation you have enjoyed since you bought the home. A home equity loan is a lump sum of cash, while a HELOC is a credit line that works pretty much like a credit card.

It is possible to get a home equity loan with bad credit if you find a 2nd mortgage lender that offers subprime and hard money loans for people with bad credit scores. But most mortgage lenders will be more critical of doing the loan because they are the second lien holder on your home. If you do not pay the loan, the first mortgage provider is repaid first, and the second gets the left overs. So, having poor credit will make it harder to qualify.

However, a cash out refinance on your first mortgage may be possible. See cash out refinance rules & examples. This is because your lender will refinance the entire loan and only give you cash up to an 80% LTV ratio. The lender is the first lien holder and for that reason, the loan is less of a risk for a person with poor credit.

HARP 2 and 3

The Home Affordable Refinance program was created after the mortgage crash. If you have a conventional loan that predates May 31, 2009, you may be able to refinance with poor credit.

This unique loan program must be backed by Fannie Mac or Fannie Mae. It is a good choice for those who want a lower interest rate or is upside down on their home loan.

The best part of HARP is you can qualify with a credit score as low as 620. It is important that you do not have more than one late payment in the past year. You also can have no late payments in the past six months. This is a solid choice for people who have a conventional loan and need to refinance with bad credit.

Credit Unions

It is never a bad idea to check with your local credit union about refinancing your mortgage with bad credit. If you are a member of a local credit union and you work well with them, you should talk to a loan officer about refinancing your loan. They are more likely to overlook a poor credit score to help a reliable, long term customer.

So, you do have some refinance options if you have poor credit. Be aware however that bad credit home mortgage rates seem to be on a long-term rise, and they may be above 7% in 2024. By then, it could be too late for many people to refinance and save any money.

Takeaway on Refinancing Conventional Mortgages

While having an underwater mortgage or damaged credit can pose challenges, exploring these options and working on credit improvement can increase your chances of successfully refinancing a conventional mortgage.