Refinancing With Bad Credit and Low Credit Scores

Refinancing With Bad Credit and Low Credit Scores

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this article, we will cover homeowners refinancing with bad credit and low credit scores.  With today’s historic volatile rates and increased home prices, homeowners should explore refinancing with bad credit. Gustan Cho Associates helps countless homeowners save tens of thousands of dollars by refinancing with bad credit.

It is true that the lower your credit scores, the higher your rates. However, prior bad credit such as a prior bankruptcy, foreclosure, outstanding collections, prior charged-off accounts, late payments, and other prior derogatory tradelines has no impact on rates.  If you have been paying attention to the news, you know that Americans are refinancing their mortgages while rates are historically low. The COVID-19 coronavirus outbreak has rippled through the economy in real estate and most industries across the world. This has created a historically low market for the mortgage industry.

With rates as volatile as they are, there are times when homeowners need to refinance. During times of high or low rates. Due to historic high home values, this is a great time to take advantage and use your home equity to do a cash-out refinance and save yourself thousands of dollars in interest by consolidating high interest credit cards. Even if you think your credit profile may not qualify, we encourage you to apply. In this blog, we will detail a few different refinance transactions and how to complete a refinance with less than stellar credit.

Refinancing With Bad Credit on FHA, VA, and Conventional Loans

Refinancing With Bad Credit On FHA, VA, And Conventional Loans

In this section, we are going to cover general requirements for conventional, FHA, and VA refinance transactions. These general requirements are typically true whether you complete a rate and term refinance or a cash-out refinance transaction. One of the frequently asked questions by homeowners is can you refinance with a 500 credit score?

HUD and VA are the two traditional mortgage loan programs that allow borrowers to refinance with credit scores down to 500 FICO. HUD, the parent of FHA, allows homeowners to do a cash-out and rate and term refinance with an FHA loans with a loan-to-value down to 90% loan-to-value. The Veterans Administration allow homeowners to do a cash-out refinance mortgage loan with a loan-to-value up to 100% on VA loans. Conventional and non-QM loans allow cash-out refinance with up to 80% loan-to-value.

Conventional refinance transactions are very common. This is a great tool to utilize if you are currently on an FHA mortgage loan. This may allow you to drop your monthly mortgage insurance depending on your equity position.

What Is The Role of Fannie Mae and Freddie Mac

The general guidelines for conventional mortgage lending needs to conform to Fannie Mae and Freddie Mac agency mortgage guidelines. Conventional loans need to meet Fannie Mae and Freddie Mac agency mortgage guidelines. Fannie Mae and Freddie Mac are the two mortgage giants in the United States. The role of Fannie and Freddie is to keep liquidity in the housing market by buying mortgage-backed securities on the secondary market by being the biggest buyers of mortgages.

Mortgage lenders use their warehouse line of credit to originate and fund mortgage loans. One the mortgage loans funds, lenders sell it on the secondary mortgage market. Fannie Mae and Freddie Mac will buy the packaged up mortgages, mortgage-backed securities, from a bunch of mortgage bankers.

By purchasing mortgages from mortgage bankers, it relieves the lenders of their warehouse line of credit so they can repeat the mortgage origination and funding process to make more loans. Due to this system, the role of Fannie Mae and Freddie Mac is to promote home ownership by keeping mortgage interest rates low so homebuyers can purchase homes. Fannie Mae and Freddie Mac are the two giant government-sponsored enterprises (GSEs). 

Fannie Mae Guidelines on Refinancing Conventional Loans

Homeowners who want to refinance their FHA loan to a conventional loan to avoid paying the FHA mortgage insurance premium, need to meet Fannie Mae guidelines on conventional loans. Here are the minimum Fannie Mae agency mortgage guidelines:

  • A minimum of 620 credit score is required on conventional loans
  • The higher the credit scores, the lower the rates
  • Four year waiting period after deed in lieu of foreclosure, short sale.
  • Chapter 13 bankruptcy must be discharged for a minimum of two years
  • There is a four year waiting period after Chapter 13 Bankruptcy dismissal date
  • There is a seven year waiting period after a standard regular foreclosure
  • Chapter 7 bankruptcy must be discharged for a minimum of four years
  • No mortgage late payments for at least 12 months
  • Cash-out refinance transactions are limited to 80% loan to value

Depending on your equity position, and overall qualifications, you may be able to receive an appraisal waiver with conventional refinance transactions. For more questions surrounding conventional refinancing please reach out to Mike Gracz on 630-659-7644 and email to

Refinancing With Bad Credit and Low Credit Score

HUD Guidelines on Refinancing With Bad Credit

FHA refinance transactions. FHA refinance transactions can be a great tool to save money if your credit profile does not fit the conventional credit requirements. Below are some general FHA refinance requirements:

  • A minimum credit score of 500 is required for FHA refinance transactions
  • All FHA cash-out refinance transactions are now capped at 80% loan to value
  • Rate and term FHA refinances can go up to 97.75% loan to value (580 credit score or higher)
  • May qualify while in an active chapter 13 bankruptcy
  • Chapter 7 bankruptcies must be discharged for a minimum of 2 years

FHA generally seems to be more forgiving with lower credit score borrowers. An FHA refinance can allow you to hit the financial reset button with a cash-out refinance. Depending on your equity position, you may be able to pay off high-interest consumer debts in a cash-out refinance.

Refinancing During Chapter 13 Bankruptcy

FHA refinance transactions are great for borrowers trying to refinance and pay off an active chapter 13 bankruptcy or who are less than two years discharged from a chapter 13 bankruptcy. The chapter 7 waiting period for an FHA refinance transaction is TWO years.

If you have had a foreclosure in the past, an FHA refinance transaction does require three years of seasoning from the date your deed on the foreclosed home is transferred out of your name.

When selecting a lender for an FHA refinance transaction you want to make sure your loan officer is up-to-date on the changing guidelines and able to come up with the best financial plan for you. It is a great opportunity to put your equity to work for you and save you and your family thousands of dollars.

FHA Streamline Refinancing With Bad Credit

FHA Streamline Refinancing With Bad Credit

If you purchase your home with less than stellar credit and used an FHA mortgage loan, it may be time to look into an FHA streamline refinance transaction. This allows you to refinance the current balance of your FHA mortgage loan without income verification or an appraisal.

The general requirements are you must make at least six payments on your current FHA mortgage transaction. Keep in mind, your loan amount may not increase from the principal balance due on your FHA mortgage loan current.

Depending on your taxes and insurance, you may need to bring one month of mortgage payment to the closing table (sometimes more).

Refinancing With Bad Credit on VA Loans

VA refinance transactions: There is tons of contradictory information surrounding VA mortgage lending on the internet. That is because most lenders have lender overlays on their VA mortgage products.

The good news is, the Gustan Cho Associates do not have overlays on any of their mortgage programs. That being said, we are able to refinance your VA mortgage loan up to 100% of the value of your home. Even with a cash-out transaction, a veteran may still utilize 100% of the equity.

If you are utilizing a cash-out transaction and go above 90% of the value of your home, you are paying an interest rate premium. However, the slightly higher interest rate may still be saving thousands of dollars.

What Is The VA IRRRL Streamline Refinance Loan

Besides a cash-out transaction, many veterans utilize the VA interest rate reduction refinance loan. This is very similar to the FHA streamline above and allows a veteran to refinance the current balance of their VA mortgage loan at a lower rate.

This transaction must lower a veteran’s interest rate by a minimum of half a percent. The veteran must also recoup all closing costs in a minimum of 36 months. These are very strict guidelines put in place by the VA to make sure the veteran is put in the best financial situation possible.

For questions surrounding VA refinance transactions reach out to Mike Gracz on 630-659-7644. Mike is an expert in all VA mortgage guidelines. Keep in mind, we do not have a minimum credit score requirement for VA mortgage transactions. We do have a payment history requirement per VA guidelines. The VA requires all veterans to be on time with all payments for a minimum of 12 months. If you have late payments in the past 12 months reporting to credit, it will make obtaining a VA mortgage loan very difficult.

 Best Lenders To Start The Refinancing Loan Process

Refinancing Loan Process At Gustan Cho Associates

Applying for a refinance with Gustan Cho Associates is easier than ever. The process will start with a simple phone call to Mike Gracz on 630-659-7644. You will discuss your refinance options and go over your current financial situation in detail. From there Michael will pair you with a licensed loan officer who will be able to assist. An application link will be sent to you for the state your property is located in. Below are the documents that are usually required (actual documents may vary):

  • Last 30 Days of Pay Stubs
  • Last Two Years Tax Returns
  • Last Two Years W2 or 1099s
  • Mortgage Statement
  • Homeowners Insurance Policy
  • Driver’s License
  • Certificate of Eligibility (VA only)

Once your loan officer has these items, they will reverse engineer the numbers to get you saving money as soon as possible. Feel free to call Gustan Cho Associates seven days a week with any mortgage-related questions. We would love the opportunity to assist you and your family refinance your current home. Keep in mind, refinances are available for primary residences, second homes, and investment properties. We have a wide variety of programs available and are here to assist.