Refinancing With a Low Credit Score

You could save your home or open up resources for other needs through a refinance loan, but if you have a low credit score this is probably is not possible. Credit scores are a huge factor when a bank underwriter sets your interest rate. Refinancing may be an option to save money when you have a low score, but only if you improve your overall financial picture.

Identification

A borrower can get a loan with a low credit score, but probably not with one less than a 500 to 520, according to Bills.com. Even at these scores you will likely have to go to a "sub-prime" lender that specializes in mortgages for people with bad credit. These rates, however, are the highest in the mortgage industry, so it may not save money to refinance at this point. One of the few ways refinancing could help a person with a low credit score is if the new loan lowers your monthly payment. This would only happen if the lender lengthens the repayment schedule, thereby giving you more time to pay off the loan.

Considerations

Mortgage providers look at more just a pure FICO score calculation to set loan rates. The lender might offer better rates if you significantly improve your debt-to-income ratio -- debt obligations divided by monthly income. In the mortgage industry, lenders like to see a DTI less than 36 percent. You could also offer to pay down a large portion of the home; 20 percent is a "good" down payment.

Improving Your Score

Your best shot at receiving a refinance loan and saving money in the process is improving your score before you apply for a loan. Disputing errors on your report and backing up your claim with evidence, such as bank statements, is the fastest way to boost your score, but does not help with legitimate problems. Thus, the most effective way to raise your score before refinancing is paying down debt and paying bills on time.

Tip

Assess why you need to refinance. If you frequently miss payments, look for ways to cut spending out of your monthly budget. At the very least, go to mortgage providers and see what an officer thinks of your financial picture and whether refinancing makes sense. The worst that can happen is they tell you refinancing won't help.