Can you refinance a mortgage with bad credit with a 500 credit score? Yes. Learn how FHA, VA, and Non-QM loans help homeowners refinance a mortgage with bad credit mortgage with bad credit in 2026.
Key Takeaways
- You can refinance with bad credit (scores as low as 500-580) through FHA, VA, and Non-QM loan programs
- Expect interest rates 0.5% to 1.5% higher than conventional loans, but you can still save money overall
- FHA Streamline and VA IRRRL programs often require minimal documentation and no appraisal
- Building equity (20%+ in your home) dramatically improves your refinancing options
- Focus on improving your debt-to-income ratio and payment history before applying
You’re Not Alone—And You Have Options
Learning how to refinance a mortgage with bad credit is easier than you think. If your credit score has taken a hit…
Thousands of homeowners with credit scores between 500 and 620 successfully refinance every year. Lenders understand that life happens, and your credit score doesn’t define your entire financial picture.
In lending terms, bad credit typically means a FICO score below 620. Traditional banks often reject applicants in this range, but government-backed programs and subprime lenders specialize in helping borrowers like you.
Can You Refinance with Bad Credit? Yes—But With Conditions
The short answer is yes, you can refinance with bad credit. However, you’ll need to meet certain requirements that conventional borrowers don’t face.
Most bad credit refinance programs require you to have at least 12 months of on-time mortgage payments. Even if your credit score is low, demonstrating recent payment responsibility shows lenders you’re serious about meeting your obligations.
You’ll also need sufficient equity in your home. For FHA loans, lenders typically require you to keep at least 20% equity after a cash-out refinance. If you’re doing a rate-and-term refinance (no cash out), requirements may be more flexible.
Your debt-to-income ratio matters more when your credit is imperfect. Most programs cap this at 43-50%, meaning your total monthly debt payments can’t exceed half your gross monthly income.
Your Best Refinancing Options for 2026
FHA Streamline Refinance
If you currently have an FHA loan, the FHA Streamline program is your fastest path to lower payments. This program requires minimal paperwork, no appraisal in most cases, and accepts credit scores as low as 580.
The catch? You can’t take cash out with a Streamline refinance. It’s purely for lowering your interest rate or switching from an adjustable-rate to a fixed-rate mortgage. You’ll also need to show a clear financial benefit (typically a 0.5% rate reduction).
Closing costs for FHA Streamline loans are often lower because there’s no appraisal required. However, you’ll still pay an upfront mortgage insurance premium (1.75% of the loan amount) plus monthly mortgage insurance.
VA Interest Rate Reduction Refinance Loan (IRRRL)
Veterans and active-duty service members with existing VA loans can use the IRRRL program, also called a VA Streamline. This program doesn’t have a minimum credit score requirement, though most lenders prefer 580 or higher.
Like the FHA Streamline, the VA IRRRL doesn’t allow cash-out. It’s designed to reduce your interest rate with minimal hassle. You won’t need a new Certificate of Eligibility or a home appraisal in most cases.
The VA funding fee for an IRRRL is just 0.5% of the loan amount—significantly lower than a standard VA refinance. Disabled veterans may qualify for a fee waiver.
Non-QM Loans (Non-Qualified Mortgage)
Non-QM lenders are private companies that don’t follow standard Fannie Mae or Freddie Mac guidelines. They create their own underwriting rules, which means they can approve borrowers with credit scores as low as 500.
These loans work well if you’re self-employed, have irregular income, or need to take cash out of your home. Non-QM loans focus more on your assets and equity than your credit score or employment history.
The tradeoff? Expect higher interest rates (often 1-2% above conventional rates) and larger down payments. You’ll also need substantial equity—most Non-QM lenders require a loan-to-value ratio of 70-80% or less.
The Real Cost of Refinancing with Bad Credit
Let’s be honest: refinancing with bad credit costs more. You’ll pay higher interest rates because lenders view you as a higher risk. In 2026, expect rates that are 0.5% to 1.5% above prime conventional rates.
For context, if conventional borrowers are getting 6.5% rates, you might see offers between 7% and 8%. While this sounds steep, it can still make financial sense if you’re currently paying 8.5% or higher on your existing mortgage.
You’ll also face higher closing costs. Lenders may charge additional origination fees or require more comprehensive appraisals. Budget 2-5% of your loan amount for closing costs.
If you’re using credit repair services or need to pay off collections before closing, factor those costs into your decision. Sometimes waiting 3-6 months to improve your credit score can save you thousands in interest over the life of the loan.
Loan Comparison: Know Your Options
| Loan Type | Minimum Credit Score | Maximum LTV | Best For |
|---|---|---|---|
| Conventional Loan | 620-640 | 80% (97% for primary residence purchases) | Good credit borrowers with standard employment |
| FHA Loan | 500-580 | 96.5% (80% for cash-out) | Lower credit scores, first-time buyers, steady income |
| Non-QM Loan | 500+ | 70-80% | Self-employed, non-traditional income, high equity |
Note: LTV = Loan-to-Value Ratio. A lower LTV means you have more equity in your home.
5 Steps to Refinance a Mortgage with Bad Credit
Step 1: Check Your Credit Reports for Errors
Pull your free credit reports from all three bureaus (Equifax, Experian, TransUnion) at AnnualCreditReport.com. Dispute any errors immediately—removing even one mistake can boost your score by 20-30 points.
Step 2: Calculate Your Equity and Loan-to-Value Ratio
Find out what your home is worth using online tools like Zillow or Redfin (or get a professional appraisal). Subtract your remaining mortgage balance to determine your equity. Divide your loan balance by your home’s value to get your loan-to-value ratio.
Step 3: Gather Your Financial Documents
You’ll need recent pay stubs (last 2 months), W-2s or tax returns (last 2 years), bank statements (last 2 months), and your current mortgage statement. Self-employed borrowers should have 1099s and business bank statements ready.
Step 4: Shop Multiple Lenders Who Specialize in Bad Credit
Don’t settle for the first offer. Compare at least 3-5 lenders who specifically advertise programs for lower credit scores. Use soft credit pull services to check rates without hurting your credit score further.
Step 5: Lock Your Rate and Close the Loan
Once you find the best offer, lock your interest rate in writing. Complete any final documentation requests quickly—delays can cause your rate lock to expire. Plan for closing to take 30-45 days from application.
Frequently Asked Questions
Can I refinance with a 580 credit score?
Yes. FHA loans accept credit scores as low as 580 (or even 500 with a larger down payment). VA loans and Non-QM lenders also work with borrowers in the 580 range. Your interest rate will be higher than conventional loans, but refinancing is absolutely possible.
Will refinancing hurt my credit score?
Your score may drop 5-10 points temporarily due to the hard credit inquiry and closing of your old loan. However, if refinancing helps you make on-time payments more easily or pay down high-interest debt, your score will improve over the next 6-12 months.
How long do I need to wait after bankruptcy or foreclosure?
For FHA loans, you must wait 2 years after a Chapter 7 bankruptcy discharge and 3 years after a foreclosure. Conventional loans require 4 years post-foreclosure and 4 years post-bankruptcy. VA loans may allow refinancing after 2 years with strong extenuating circumstances.
Should I pay off collections before refinancing?
It depends. Some lenders require all collections over $2,000 to be paid before closing. However, paying old collections can sometimes lower your credit score temporarily. Consult with your lender before paying anything—they may accept a payment plan instead.
You Can Do This—Take the First Step Today
Refinancing with bad credit isn’t easy, but it’s far from impossible. Thousands of homeowners in your situation have successfully lowered their payments, switched to better loan terms, or accessed their home equity to consolidate debt.
The key is working with lenders who understand your situation and specialize in subprime lending. Don’t let shame or fear stop you from exploring your options.
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