By David Park | Former Mortgage Loan Officer, 12 Years

How to Refinance with Bad Credit: Options, Requirements, and Strategies

Here is something most mortgage websites will not tell you: refinancing with bad credit is absolutely possible. It is more expensive, the options are narrower, and you need to be strategic about it, but it can be done. I spent 12 years as a mortgage loan officer, and some of the most rewarding files I closed were for borrowers with credit scores in the 500s and low 600s who were told by other lenders that refinancing was impossible.

The mortgage industry profits from the perception that you need a 740+ credit score to get a good deal. That perception keeps borrowers with lower scores from shopping around, which means they stay stuck in high-rate loans and never challenge the status quo. This guide is going to change that for you.

We will cover every refinance option available to borrowers with credit scores below 680, the exact score thresholds you need to know, what rates to realistically expect, and a concrete plan for improving your credit before you apply.

What Counts as “Bad Credit” for Mortgage Refinancing?

Credit scores range from 300 to 850. For mortgage purposes, here is how lenders generally categorize scores:

740 and above: Excellent. You qualify for the best rates across all programs.
700 to 739: Good. Slightly higher rates, but you have access to virtually every program.
680 to 699: Fair. You are still in decent shape, but some lenders will charge higher rates or additional fees.
620 to 679: Below average. Your options start to narrow. Conventional loans become harder to get.
580 to 619: Poor. Conventional refinancing is extremely difficult. FHA becomes your primary option.
500 to 579: Very poor. Only FHA loans with 10%+ equity, or VA loans if you are a veteran.
Below 500: Extremely limited options. Most government programs will not cover you.

The important thing to understand is that these are not arbitrary cutoffs. They correspond to specific loan program requirements set by Fannie Mae, Freddie Mac, FHA, and VA. Let me break down each option.

Refinance Options by Credit Score Range

Option 1: Conventional Refinance (Minimum Score: 620, Realistically 660+)

Fannie Mae and Freddie Mac technically allow conventional refinances with credit scores as low as 620. However, the reality is more nuanced.

At a 620 score, you face:

Significantly higher interest rates: A borrower with a 620 score will pay approximately 1.5% to 2.0% more in interest than a borrower with a 740 score on the same loan. On a $250,000 loan, that translates to roughly $200 to $300 more per month.
Loan-level price adjustments (LLPAs): These are fees charged by Fannie Mae and Freddie Mac based on your credit score and loan-to-value ratio. At a 620 score with 80% LTV, the LLPA is approximately 3.0% of the loan amount, or $7,500 on a $250,000 loan. This gets baked into your rate or charged as upfront points.
Stricter DTI requirements: Many lenders cap DTI at 43% for borrowers under 680, compared to 50% for higher-score borrowers.
Limited lender availability: Many lenders set their own minimum at 640, 660, or even 680 for conventional refinances. A borrower with a 620 score may need to contact 5 to 10 lenders before finding one that will approve the application.

My honest take: If your credit score is below 660, a conventional refinance is rarely the best option. The pricing penalties are severe enough that FHA or VA programs almost always offer better terms.

Option 2: FHA Refinance (Minimum Score: 500 with Conditions)

FHA loans are the workhorse for borrowers with lower credit scores. The FHA offers two refinance paths:

FHA Rate-and-Term Refinance (for non-FHA borrowers):

Minimum credit score: 580 for up to 96.5% LTV (3.5% equity)
Minimum credit score: 500 to 579 for up to 90% LTV (10% equity)
Full income and asset documentation required
Appraisal required
Maximum DTI: typically 43% to 50%, depending on compensating factors

FHA Streamline Refinance (for current FHA borrowers only):

No minimum credit score required by the FHA
Lender overlays typically range from 580 to 640
No appraisal, no income verification (non-credit qualifying track)
Must demonstrate net tangible benefit

The FHA’s willingness to work with borrowers down to a 500 credit score is remarkable. No other mainstream loan program comes close. However, FHA loans carry mortgage insurance costs that you need to factor in:

Upfront MIP: 1.75% of the loan amount (can be financed)
Annual MIP: 0.55% for most borrowers (paid monthly)

On a $250,000 FHA loan, the upfront MIP is $4,375, and the annual MIP adds about $114.58 per month to your payment. These costs are real, but for a borrower with a 560 credit score, the FHA may be the only game in town, and the rate will still be dramatically better than a subprime or hard money alternative.

Option 3: VA Refinance (Minimum Score: Varies, Often No Minimum)

If you are a veteran or active-duty service member, the VA loan program is your best friend when credit is challenged. The VA itself does not set a minimum credit score for VA refinances. However, lenders impose their own minimums:

Most VA lenders: 580 to 620 minimum
Some specialized VA lenders: 500 to 560 minimum
VA IRRRL (streamline): Some lenders go as low as 500 for existing VA borrowers

The VA loan has two massive advantages for borrowers with bad credit:

No mortgage insurance: Unlike FHA, VA loans never charge monthly mortgage insurance, regardless of your LTV or credit score. This can save $100 to $300 per month compared to FHA.
More lenient underwriting: VA underwriters consider the whole picture, including military service, disability status, and residual income (money left over after all bills are paid). A veteran with a 580 score but strong residual income may receive approval where a civilian borrower would not.

The VA funding fee applies (2.15% for first use, 3.3% for subsequent use on purchase loans, but only 0.5% for IRRRLs). Veterans with service-connected disabilities are exempt from the funding fee entirely.

Option 4: USDA Streamline Refinance (Minimum Score: Typically 580+)

If you have an existing USDA loan, the USDA Streamline Refinance program allows refinancing with reduced documentation. The USDA does not publish a specific minimum credit score, but most lenders require 580 to 640. Like FHA and VA streamlines, no appraisal is required for the USDA Streamline.

This option only applies if you currently have a USDA loan, which means your property is in a USDA-eligible rural area.

Option 5: Non-QM (Non-Qualified Mortgage) Refinance

For borrowers who do not fit into any government program box, non-QM lenders offer an alternative. Non-QM loans are private loans that do not conform to the “Qualified Mortgage” rules set by the CFPB. They are available to borrowers with:

Credit scores as low as 500 (at some lenders)
Recent bankruptcies or foreclosures
Self-employment income that is difficult to document
High DTI ratios
Non-traditional income sources

The tradeoff? Non-QM rates are significantly higher, typically 2% to 4% above conventional rates. A borrower with a 550 credit score might see a non-QM rate in the 9% to 11% range as of early 2026. These loans also often carry higher fees and less favorable terms.

I generally recommend non-QM only as a bridge strategy: refinance now to get out of a terrible situation (such as an adjustable-rate loan that is about to reset), then improve your credit and refinance again into a conventional or FHA loan within 1 to 2 years.

What Interest Rates to Expect with Bad Credit

Let me give you realistic rate expectations as of March 2026. These are approximate ranges and will vary by lender, loan-to-value ratio, and other factors:

Credit Score Range	Conventional Rate	FHA Rate	VA Rate
740+	6.25% to 6.50%	6.00% to 6.25%	5.75% to 6.00%
700 to 739	6.50% to 6.875%	6.25% to 6.50%	6.00% to 6.25%
660 to 699	7.00% to 7.50%	6.50% to 6.875%	6.25% to 6.50%
620 to 659	7.50% to 8.25%	6.75% to 7.25%	6.50% to 7.00%
580 to 619	Rarely available	7.00% to 7.75%	6.75% to 7.25%
500 to 579	Not available	7.50% to 8.50%	7.00% to 8.00%

Notice how FHA and VA rates remain more competitive than conventional rates at every credit score level below 700. The gap widens as scores decrease. A borrower with a 600 credit score might pay 7.25% on an FHA loan versus 8.0%+ on a conventional loan (if they could even find a conventional lender willing to approve them).

This is why I always tell borrowers with credit below 680 to explore FHA first, and VA first if they are eligible.

How to Improve Your Credit Before Refinancing

If your refinance is not urgent, spending 3 to 6 months improving your credit score can save you tens of thousands of dollars over the life of the loan. Here is a prioritized action plan:

Priority 1: Pay Down Credit Card Balances (Impact: High, Timeline: 1 to 2 Months)

Your credit utilization ratio (the percentage of available credit you are using) accounts for approximately 30% of your FICO score. Reducing utilization is the fastest way to boost your score.

The targets:

Get every individual card below 30% utilization (bare minimum)
Get every card below 10% utilization (optimal)
Total utilization across all cards below 10% is ideal

Example: If you have a credit card with a $5,000 limit and a $4,200 balance (84% utilization), paying that down to $400 (8% utilization) could boost your score by 40 to 80 points within 30 to 45 days.

If you cannot pay down balances all at once, focus on the cards closest to their limits first. Getting a card from 95% utilization to 25% utilization produces a bigger score bump than getting a card from 40% to 10%.

Priority 2: Dispute Errors on Your Credit Report (Impact: Medium to High, Timeline: 30 to 45 Days)

According to the FTC, approximately 1 in 5 consumers has an error on at least one credit report. Pull your free credit reports from AnnualCreditReport.com (you can get one from each bureau weekly) and look for:

Accounts that do not belong to you
Late payments that were actually made on time
Incorrect balances or credit limits
Accounts listed as open that you closed
Duplicate collection accounts

File disputes directly with the credit bureau (Equifax, Experian, or TransUnion) for each error. They have 30 days to investigate and respond. A removed collection or corrected late payment can boost your score by 20 to 100+ points depending on the item.

Priority 3: Become an Authorized User (Impact: Medium, Timeline: 1 to 2 Months)

If a family member or trusted friend has a credit card with a long history, low utilization, and perfect payment record, ask them to add you as an authorized user. Their positive account history will appear on your credit report and can boost your score.

Key requirements for this to work:

The card must have a long history (5+ years is ideal)
Utilization on the card must be below 10%
Payment history must be perfect (zero late payments)
The card issuer must report authorized users to the credit bureaus (most do, but verify)

You do not even need to receive or use the physical card. The account history appears on your credit report regardless.

Priority 4: Do Not Close Old Accounts (Impact: Medium, Timeline: Ongoing)

The length of your credit history accounts for approximately 15% of your FICO score. Closing old credit cards reduces your average account age and can hurt your score. Even if you do not use an old card, keep it open (unless it has an annual fee that is not worth paying).

Priority 5: Avoid New Credit Applications (Impact: Low to Medium, Timeline: Ongoing)

Each new credit application generates a “hard inquiry” that can reduce your score by 5 to 10 points. In the months before a refinance, avoid applying for new credit cards, car loans, personal loans, or store credit.

The exception: mortgage rate shopping. If you apply with multiple mortgage lenders within a 14 to 45 day window (depending on the scoring model), all those inquiries count as a single inquiry for FICO purposes. This is by design, so you are not penalized for comparison shopping. Take advantage of this by comparing at least 3 mortgage lenders.

Priority 6: Address Collections Strategically (Impact: Variable, Timeline: 1 to 3 Months)

Collections accounts are tricky. Paying off a collection does not automatically remove it from your credit report. Under older FICO models, a paid collection and an unpaid collection have the same negative impact. However, under FICO 9 and newer models (and under some lender guidelines), paid collections are treated more favorably.

Before paying a collection, try to negotiate a “pay for delete” agreement where the collector agrees to remove the account from your credit report in exchange for payment. Get this agreement in writing before sending any money.

For medical collections specifically: FICO 9 ignores paid medical collections entirely, and as of 2023, the three major credit bureaus no longer report medical collections under $500.

Realistic Score Improvement Expectations

With disciplined effort, here is what you can realistically expect:

1 month: 20 to 40 point increase (from paying down credit cards)
2 months: 30 to 60 point increase (adding credit disputes and authorized user accounts)
3 months: 40 to 80 point increase (compounding effects of all actions)
6 months: 60 to 120 point increase (with sustained effort)

A borrower who goes from a 580 to a 660 over 3 to 6 months moves from limited FHA-only options to a much wider range of programs with significantly better rates. That 80-point improvement could save $150 to $250 per month on a $250,000 loan.

Strategies for Refinancing with Bad Credit Right Now

If you cannot wait to improve your credit, here are strategies to get the best deal possible today:

1. Start with FHA or VA

Do not waste time applying for conventional loans if your score is below 660. Go directly to FHA (or VA if eligible). You will get better rates, more lenient underwriting, and a higher chance of approval.

2. Compare at Least 3 Lenders (Ideally 5)

Rate variation between lenders is even wider for low-credit borrowers than for high-credit borrowers. One lender might quote 7.5% while another quotes 6.875% for the exact same scenario. The only way to find the best deal is to get multiple quotes.

When comparing, ask each lender specifically:

What is your minimum credit score for this loan program?
What rate and APR are you offering for my credit score?
What are the total closing costs?
Do you offer any lender credits to reduce upfront costs?

3. Consider a Larger Down Payment or Paying Down Your Balance

If you have savings, using them to reduce your loan-to-value ratio can offset some of the credit score penalty. A borrower with a 600 credit score and 70% LTV will get a better rate than one with 90% LTV, because the lower LTV reduces the lender’s risk.

4. Add a Co-Borrower with Better Credit

If your spouse, partner, or family member has a higher credit score and is willing to be on the loan, adding them as a co-borrower can improve your rate. Most lenders use the lower of the two borrowers’ middle scores for pricing, but some use an average or the primary borrower’s score. Ask each lender how they handle co-borrower credit scores.

Important caveat: adding a co-borrower means they are legally responsible for the debt. Do not add someone who is not comfortable with that responsibility.

5. Look for Manual Underwriting

Some lenders offer manual underwriting, where a human underwriter reviews your file rather than relying solely on automated systems. Manual underwriting considers compensating factors that automated systems miss:

Large cash reserves (6+ months of mortgage payments in the bank)
Long employment history (2+ years at the same employer)
Low DTI ratio (below 35%)
Consistent rent payment history (12+ months of on-time payments)
The reason behind your low credit score (medical bills vs. reckless spending)

FHA and VA loans are more likely to receive manual underwriting than conventional loans. If your credit score is low but your overall financial picture is strong, manual underwriting can be the difference between approval and denial.

6. Time Your Application Strategically

Credit scores update once per month when your creditors report to the bureaus. If you have been paying down credit card balances, wait until after those lower balances are reported before applying. You can check your updated score through free services like Credit Karma (which uses VantageScore) or through your bank or credit card issuer (many provide FICO scores).

Ideally, check all three bureau scores and time your application for when they are at their highest point in the monthly cycle.

What About Bankruptcy or Foreclosure?

If your bad credit stems from a bankruptcy or foreclosure, there are specific waiting periods before you can refinance:

After Chapter 7 Bankruptcy

FHA refinance: 2 years from discharge date
VA refinance: 2 years from discharge date
Conventional refinance: 4 years from discharge date
USDA refinance: 3 years from discharge date

After Chapter 13 Bankruptcy

FHA refinance: 1 year into the repayment plan (with court approval), or 2 years after discharge
VA refinance: 1 year into the repayment plan (with court approval)
Conventional refinance: 2 years from discharge date, 4 years from dismissal date

After Foreclosure

FHA refinance: 3 years from the completion of foreclosure
VA refinance: 2 years from the completion of foreclosure
Conventional refinance: 7 years from the completion of foreclosure

After Short Sale

FHA refinance: 3 years
VA refinance: 2 years
Conventional refinance: 4 years (with 10% down) or 7 years (with less than 10% down)

These waiting periods assume you have reestablished credit and meet other program requirements. The waiting period alone does not guarantee approval.

The Cost of Waiting vs. Refinancing Now

One question I get constantly: “Should I refinance now with my bad credit, or wait until my score improves?”

The answer depends on your current rate versus available rates. Let me run a scenario:

Current situation: $275,000 loan balance at 8.5% (originated when credit was even worse). Monthly payment: $2,113 (principal and interest).

Refinance now at 7.25% (with 600 credit score): Monthly payment drops to $1,876. Monthly savings: $237.

Wait 6 months, improve credit to 680, refinance at 6.5%: Monthly payment drops to $1,738. Monthly savings vs. current: $375.

But during those 6 months of waiting, you pay $1,422 more in interest than you would have at 7.25% ($237 per month for 6 months). And you still face closing costs on the future refinance.

In many cases, refinancing now and then refinancing again in 12 to 18 months (after credit improvement) produces the best total outcome. Yes, you pay closing costs twice, but the monthly savings during the interim period often outweigh those costs. This is especially true if your current rate is above 8%.

Run the numbers for your specific situation. A mortgage calculator and a spreadsheet are more trustworthy than gut feelings.

Red Flags and Scams Targeting Bad-Credit Borrowers

Borrowers with bad credit are prime targets for predatory lenders. Watch out for:

Guaranteed approval claims: No legitimate lender can guarantee approval before reviewing your file. Anyone who promises approval regardless of credit is either lying or offering terms you do not want.
Excessive upfront fees: Legitimate lenders do not charge application fees of $500 or more. If someone asks for significant money before you even have a Loan Estimate, walk away.
Pressure to misrepresent income or assets: This is mortgage fraud. If a loan officer suggests inflating your income on the application, end the conversation immediately.
Extremely high rates without clear justification: Even with a 500 credit score, rates above 10% on a first mortgage should raise questions. Get competing quotes.
Mandatory “credit repair” services bundled with the loan: Some companies charge $1,000+ for credit repair services that you could do yourself. Credit repair companies cannot do anything you cannot do on your own (dispute errors, negotiate with creditors, etc.).

The Bottom Line

Refinancing with bad credit is not just possible. For many borrowers, it is financially smart, even at higher interest rates, if it gets you out of a worse loan. The key is understanding your options, knowing which programs work at your credit level, and comparing enough lenders to find competitive pricing.

Here is the action plan:

Check your credit scores from all three bureaus. Know exactly where you stand.
Identify your best program: FHA for most borrowers below 680, VA for eligible veterans, conventional only above 660.
If you can wait 3 to 6 months, use that time to pay down credit cards, dispute errors, and push your score up by 40 to 80 points.
If you cannot wait, refinance now into the best available program and plan to refinance again after improving your credit.
Compare at least 3 lenders (5 is better for low-credit borrowers). Rate variation is wider at lower credit scores, so shopping around pays off even more.
Read every document. Verify the rate, fees, and terms on your Loan Estimate and Closing Disclosure match what you were quoted.

Your credit score is a snapshot, not a life sentence. The borrowers I worked with who took control of their credit, made a plan, and shopped aggressively for the best terms consistently saved thousands of dollars compared to those who accepted the first offer out of desperation or embarrassment.

You deserve a fair deal, and it is out there. Go find it.

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