Bad Credit Refinance Alternatives To Consider

If you're having trouble paying your mortgage on time or your monthly debt payments are unmanageable, you might try to refinance your mortgage with your lender. But if your credit score has been negatively impacted and lowered, your mortgage lender may not be able to provide you with a refinance option, due to strict credit requirements.

A bad credit score can be frustrating, especially if you're facing a delinquency or foreclosure. Accessing the equity you’ve built in your home shouldn’t be so tough. There are several bad credit refinance alternatives you should consider and pursue first. Let’s take a closer look.

When Can You Refinance?

In many cases, borrowers can refinance their mortgages to get cash to pay off other loans, including credit cards or personal loans, in exchange for new loan terms. Refinancing an existing loan into a new loan can help in many ways. Sometimes refinancing can allow a homeowner to obtain a lower interest rate and monthly payment or access needed cash for other bills and projects. 

Even if you are refinancing with a higher interest rate, you may be able to pay off other higher interest debt — making it worth the higher mortgage rate. 

Although a refinance can be beneficial for someone struggling to make their payments, many borrowers are unable to qualify due to minimum credit score requirements or payment history. Every lender will run a credit check of your FICO score before approving you for a new loan. This includes auto loans, home loans, and business lines of credit. 

If you have bad credit, you may find yourself looking for options, resulting in too many recent credit inquiries. These credit inquiries or hard credit checks can lower your credit score, making it difficult to qualify for a refinance. Conventional loans can be challenging, and eligibility for refinancing can be tight, especially if you have a high debt-to-income (DTI) ratio. Missed payments and delinquencies may further lower your credit score.

There are ways to escape a difficult financial spot, even with a lower credit score. With the right knowledge, you can secure a loan with a lower rate or lower monthly payment, or receive the funds you need to improve your financial health. Let’s take a look at some refinancing options.

1. Use the FHA Streamline Refinance Program

The US Federal Housing Administration offers various high-quality home loans to prospective homebuyers. 

If you already have an FHA loan, you can use the FHA streamline refinance program, which allows you to take out a new refinanced loan with:

  • Very low paperwork requirements
  • Potentially a mortgage insurance premium refund, if you refinance within three years of when your original FHA loan first closed

Remember that this refinance alternative has to produce a so-called "net tangible benefit." You have to prove that refinancing your loan will result in a 5% or more reduction in your monthly mortgage payment OR be a shift from an adjustable-rate loan to a fixed-rate loan. You can’t take out more than $500 in cash if you refinance your loan under this program.

2. Use a VA Streamline Refinance

Similarly, if you already have a Department of Veterans Affairs loan, you can apply and potentially be approved for a VA Streamline refinance loan. This is also called an Interest Rate Reduction Refinance Loan (IRRRL).

IRRRLs require you to give two years of federal income tax returns and W-2s, plus recent pay stubs, to be approved for a new VA loan. This could be an excellent way to refinance your mortgage with better terms and lower payments. Remember that many requirements for an FHA refinance loan also apply to this streamlined refinance program. Keep in mind that you need to be a veteran to qualify for a VA loan.

3. Get a Co-Signer for the Refinanced Loan

If you have someone willing to take on financial responsibility for your mortgage, you can find a co-signer and approach your lender or a bank for a refinance option. For instance, if your credit score is too low to be approved for a mortgage refinance from your current lender, bringing a co-signer with a high credit score could make a difference.

The co-signer will be on the hook for payments and credit score penalties if you fail to make your mortgage payments. In addition to their credit score, a co-signer’s current debt and income will be used to recalculate your debt-to-income ratio. 

Therefore, your co-signer should be someone you trust and who trusts you – don't pursue a refinance in this way if you aren't sure whether you can make mortgage payments, even if they are significantly lowered.

On top of that, you'll need to answer questions about the co-signer's relationship to the property. Cosigning is easier if the co-signer co-owns the property with you, so it’s ideal to pursue this bad credit refinance alternative with a spouse, sibling, close family member, significant other, etc.

4. Pursue a Cash-Out Refinance

A cash-out refinance only works if you currently have built-up home equity. When you take out a cash refinance, you exchange the equity you've built in your property for cash, then take on a larger mortgage. You borrow more than you owe on your current mortgage, pocketing the cash difference.

A cash-out refinance doesn't add more monthly bills to your list of payments, and you can still benefit from the other advantages of refinancing your mortgage, such as a lower interest rate or reduced monthly fees. However, cash-out refinances always carry higher interest rates, because they are higher risk since the homeowner is taking equity out of the property.

That said, you'll usually need a credit score of 580 if you want to take out a cash-out refinance, though you may be able to squeak in with a credit score lower than this if you have a history of working with a specific bank or credit union.

5. Co-Ownership With Balance

Get the cash and help you need with Balance's homeownership program.

Over the years and with no minimum credit score, Balance has helped many homeowners with bad credit get the cash they need to get caught up and better their lives. Balance allows homeowners to pay off their existing mortgage and access funds by selling a portion of their home equity vs taking on additional debt. With your mortgage paid off, you'll make an affordable monthly payment to Balance and have ongoing access to a portion of your home equity to avoid setbacks while your credit recovers.

You’ll remain in control and on title of your home. You’ll make one simple monthly payment to Balance that covers all your taxes, insurance, HOA, and occupancy. 

You can use the cash to pay off debt, bring past due balances current, which may help lower your monthly payments. Or make necessary home improvements. Balance believes we can help you rebuild your credit and financial health — and create your path back to traditional homeownership. 

There’s no minimum term, and you can even buy Balance out and refinance your equity ownership into a traditional mortgage when you’re ready.

This could be a great option if you are or are becoming delinquent on your mortgage or other debt, you have poor payment history, had an income disruption, or have a low credit score. Compared to the other options, a co-ownership with Balance could be the best bad credit refinance alternative for anyone dealing with unexpected financial hardship, health issues, or other difficulties.

Contact Balance Today

In the end, contacting Balance to invest in your home could be the best way to stay in your home while getting your finances back on track. With Balance’s help and investment, you could stabilize your finances and get the breathing room you need to pay the debts that led to you considering a refinance. 

With Balance, you’re not limited – you’re set free. Contact us today to learn more.


Streamline Refinance Your Mortgage | / U.S. Department of Housing and Urban Development (HUD)

Interest Rate Reduction Refinance Loan | Veterans Affairs

Cash-Out Refinancing Explained: How It Works and When to Do It | Investopedia

What is a Co-Signer? Does Co-Signing Impact Your Credit Scores? | Equifax®

FHA Refinance With a Cash-out Option in 2023 | FHA