How to Get a Cash Out Refinance With Bad Credit

Getting a cash out refinance with bad credit can be challenging, but it is not impossible. Lenders use your credit score, home equity, income, and debts to decide whether to approve the loan and how much it will cost. If your score is low, you may need to rely on government-backed programs or work with lenders that have more flexible underwriting.

The most realistic paths for a cash out refinance with bad credit are FHA and VA loans. Both allow lower credit scores than many conventional refinance products, but they come with their own rules about equity, mortgage insurance, and funding fees. Understanding what lenders look for can help you present a stronger application.

This guide explains the options, eligibility requirements, common costs, and practical ways to improve your approval odds. The goal is not to guarantee an approval but to show you what is possible and how to prepare before you apply.

Quick Answer

Yes, you can get a cash out refinance with bad credit through FHA, VA, or some portfolio lenders, but you will likely face stricter terms. FHA and VA programs are more forgiving of low scores than conventional loans. Reducing debt and keeping more home equity improves your odds.

What Is a Cash Out Refinance?

A cash out refinance replaces your existing mortgage with a new, larger loan. The difference between the new loan amount and what you owe on the old mortgage is paid to you in cash at closing. Homeowners often use this cash to consolidate higher-interest debt, fund home improvements, cover medical bills, or build an emergency fund.

Because the new loan is larger than the old balance, the lender takes on more risk. That is why cash out refinance loans typically require more home equity and often have slightly higher interest rates than rate-and-term refinances. Lenders want to see that you have enough equity to protect their investment if property values fall.

With bad credit, that risk calculation becomes even more important. A low credit score signals past payment problems, so the lender may limit how much cash you can take out, charge a higher rate, or require mortgage insurance or other safeguards.

Can You Get a Cash Out Refinance With Bad Credit?

Yes, you can get a cash out refinance with bad credit, but your options are narrower than they would be with a higher score. Conventional cash out refinance loans from Fannie Mae or Freddie Mac generally require a minimum credit score of 620 or higher. If your score is below that, you will likely need to look at FHA, VA, or portfolio loan programs.

FHA cash out refinance loans are available to borrowers with lower credit scores, but they cap the loan-to-value ratio at 80%. That means you must have at least 20% equity in your home after the refinance. If your home is worth $300,000 and you still owe $200,000, you have $100,000 in equity, which is 33%, so you may be able to get a cash out refinance up to an 80% total loan-to-value ratio.

VA cash out refinance loans are available to eligible veterans, active-duty service members, and some surviving spouses. The VA does not set a minimum credit score, but each lender can impose its own minimum, often around 580 to 620. VA cash out refinance loans may allow you to borrow up to 100% of your home’s value, depending on the lender and your individual situation.

Other options include portfolio loans from banks or credit unions that keep the loan on their own books, and some non-qualified mortgage lenders work with borrowers who have damaged credit. These loans can be more flexible, but they may come with higher rates, points, or stricter equity requirements.

FHA Cash Out Refinance for Bad Credit

FHA cash out refinance loans are insured by the Federal Housing Administration. They are often the first choice for borrowers with credit scores below 620 because the FHA does not automatically reject a borrower based only on credit score. Instead, the FHA requires lenders to evaluate the overall credit picture, including the reason for past late payments and whether the borrower has re-established good payment habits.

To qualify for an FHA cash out refinance, you generally need to:

• Have a minimum credit score as set by the lender. Many lenders require at least 580 for an FHA cash out refinance, but some may accept scores as low as 500 if you have significant equity.
• Have at least 20% equity in the home, because the maximum loan-to-value ratio is 80%.
• Have a history of on-time mortgage payments for the past 12 months, or since you obtained the mortgage if it is newer.
• Occupy the home as your primary residence; FHA cash out refinance loans are not available for investment properties.
• Meet the FHA’s debt-to-income ratio guidelines, which typically cap total monthly debt payments at 43% of gross monthly income, though some lenders allow higher with compensating factors.

FHA cash out refinance loans require upfront and annual mortgage insurance premiums, which add to your monthly payment. The exact amount depends on the loan term, loan-to-value ratio, and when you took out your original FHA loan. On a cash out refinance, the upfront premium is often financed into the loan amount, and the annual premium is paid monthly.

Closing costs for an FHA cash out refinance are similar to other refinance loans and include an FHA appraisal, title search, origination fee, and recording fees. Some borrowers roll these costs into the new loan if there is enough equity, but that reduces the amount of cash you can receive.

VA Cash Out Refinance for Bad Credit

The VA cash out refinance is available to eligible military borrowers and offers one of the most flexible paths for a cash out refinance with bad credit. The VA itself does not set a minimum credit score, but individual lenders typically require a score in the mid-500s to low 600s. Some lenders may work with lower scores if other aspects of the application are strong, such as a low debt-to-income ratio or substantial home equity.

Unlike FHA and conventional cash out refinance loans, the VA cash out refinance can allow you to borrow up to 100% of your home’s value. This means you may not need to leave any equity in the home after the refinance. However, many lenders are more conservative and may cap the loan-to-value ratio at 90% or 95% for borrowers with lower credit scores.

To be eligible for a VA cash out refinance, you must have a valid Certificate of Eligibility and meet the service requirements. The property must be your primary residence, and you must have sufficient residual income to cover your monthly expenses after the new mortgage payment. The VA also requires a funding fee, which can be financed into the loan. Veterans with service-connected disabilities may be exempt from the funding fee.

A VA cash out refinance can be an excellent option for borrowers with bad credit because the VA loan program has strong consumer protections and no monthly mortgage insurance. However, the funding fee increases the loan balance, so it is important to compare the total cost against other options.

Other Bad Credit Cash Out Refinance Options

If you do not qualify for FHA or VA cash out refinance, you may still find options through portfolio lenders, credit unions, or non-qualified mortgage (non-QM) programs. Portfolio lenders keep the loans on their own books instead of selling them, so they can set their own credit and equity guidelines.

Some credit unions offer cash out refinance products for members with less-than-perfect credit. They may be willing to consider your entire financial picture, including savings, employment history, and the reason for your credit problems. The terms may be more favorable than those from a large bank.

Non-QM lenders also work with borrowers who do not fit standard guidelines. These lenders may accept bank statement income or consider a lower credit score if you have significant equity. However, non-QM cash out refinance loans often come with higher interest rates, larger down payment or equity requirements, and prepayment penalties, so read the fine print carefully.

Another possibility is a home equity loan or home equity line of credit (HELOC) instead of a cash out refinance. These are second liens, so you keep your existing first mortgage. If your credit is too low for a cash out refinance, a HELOC or home equity loan from a local bank or credit union might still be available, especially if you have a lot of equity.

How Lenders View Bad Credit in Cash Out Refinance

Your credit score is not the only factor, but it is one of the first things lenders look at. A low score generally means higher risk because it suggests you have missed payments, used too much credit, or had collection accounts in the past. For a cash out refinance, that risk is multiplied because you are increasing your debt and taking cash out of the home.

Lenders also look at your credit report for the type of negative items. A bankruptcy more than two years old may be viewed differently from multiple recent late payments. Some loan programs have waiting periods after a bankruptcy, foreclosure, or short sale. For example, FHA cash out refinance typically requires at least three years after a foreclosure or short sale, and two years after a Chapter 7 bankruptcy discharge, but these are general guidelines that can vary by lender.

Your payment history on the current mortgage is especially important. Even if your overall credit score is low, a spotless mortgage payment history over the past 12 months can help. Lenders often treat mortgage delinquency more seriously than other late payments.

Your debt-to-income ratio and cash reserves also matter. If you have a low credit score but a low debt-to-income ratio and several months of mortgage payments in savings, you may overcome the credit concern. Conversely, high debt combined with bad credit will make approval very difficult.

Costs and Fees of a Cash Out Refinance With Bad Credit

A cash out refinance with bad credit often costs more than one with good credit. Lenders may charge a higher interest rate to offset the risk, and you may need to pay discount points to buy down that rate. Each point typically costs 1% of the loan amount, but the exact cost varies by lender.

Closing costs usually include an origination fee, credit report fee, appraisal, title search and title insurance, recording fees, and possibly a survey. These fees can add up to several thousand dollars. With bad credit, some lenders may charge additional fees or require a higher origination fee, though these must be disclosed on the loan estimate.

FHA cash out refinance loans require an upfront mortgage insurance premium and an annual mortgage insurance premium. VA cash out refinance loans require a funding fee unless the borrower is exempt. Both of these can be financed into the new loan, but that increases the loan balance and reduces the cash you receive.

Because costs are higher, it is essential to compare at least three lenders before choosing a cash out refinance with bad credit. Look at the annual percentage rate (APR), not just the interest rate, because the APR includes many of the fees and gives a more complete picture of the loan’s cost.

Strategies to Improve Approval Odds

If your credit is low, you can still take steps before applying to improve your chances of getting a cash out refinance with bad credit. Start by checking your credit reports from the three major bureaus for errors. Dispute any incorrect negative items, especially late payments or collection accounts that do not belong to you. Even a small score increase can make a big difference in the interest rate you are offered.

Pay Down Revolving Debt

Credit card balances have a large impact on your credit score because they affect your credit utilization ratio, which is the amount of revolving debt you have compared with your credit limits. Paying down credit cards to below 30% of the limit, and ideally below 10%, can raise your score quickly.

Do not close old credit card accounts after paying them off, because closing accounts can reduce your available credit and increase your utilization ratio.

Build a Strong Payment History

Make all payments on time for at least six months before applying. This includes credit cards, auto loans, student loans, and your current mortgage. If you have missed payments in the past, a recent record of on-time payments shows lenders that you have improved your habits.

Lower Your Debt-to-Income Ratio

Lenders compare your total monthly debt payments with your gross monthly income. Paying off a car loan or credit card can lower this ratio. If that is not possible, consider adding a co-borrower with strong income and credit. A co-borrower can help you qualify for a better rate, though both borrowers are responsible for the loan.

Increase Your Home Equity

The more equity you have, the less risk the lender takes. If you can wait and continue making mortgage payments, your equity will increase as your loan balance decreases. You can also make extra principal payments to build equity faster. Many cash out refinance programs require at least 20% equity, so having 30% or more gives you a cushion and may improve your terms.

Shop Multiple Lenders

Not all lenders have the same credit score requirements for cash out refinance. A mortgage broker can help you compare FHA, VA, and portfolio loan options. Ask each lender about their minimum credit score, maximum loan-to-value ratio, and whether they offer any programs for borrowers with recent credit issues.

Avoid New Credit Inquiries

Each hard credit inquiry can lower your score by a few points. Do not apply for new credit cards, auto loans, or personal loans in the months before you apply for a cash out refinance. Also avoid financing large purchases that would increase your debt.

Alternatives to Cash Out Refinance

If a cash out refinance with bad credit is not possible or the costs are too high, consider other ways to access your home’s equity or meet your cash needs. A home equity loan or HELOC may have lower closing costs than a full refinance. However, these are second mortgages, so the lender may have higher credit standards.

You could also explore a personal loan, but unsecured personal loans for bad credit often have very high interest rates. If the cash is for a specific purpose like home repairs or medical bills, look into assistance programs, payment plans, or local nonprofit resources.

In some cases, the best strategy is to wait. Improving your credit score over six to twelve months can open the door to conventional cash out refinance options with better terms. Use that time to pay down debt, correct credit report errors, and build a stronger payment history.

The Bottom Line: Cash Out Refinance With Bad Credit

A cash out refinance with bad credit can be done, but it requires careful planning and a realistic view of the costs. FHA and VA loans are usually the most accessible government-backed options, while portfolio lenders and credit unions may offer additional flexibility. Focus on building equity, reducing debt, and comparing multiple offers before you commit.

Your credit score does not have to stay low forever. Taking small steps now, such as paying bills on time and disputing errors, can improve your next application and help you secure a better loan in the future.

FAQ

What is the minimum credit score for a cash out refinance?

Minimum credit score requirements vary by loan type and lender. Conventional cash out refinance loans often require at least 620. FHA cash out refinance loans may accept scores as low as 500 with substantial equity, but many lenders require 580 or higher. VA loans have no set minimum, but lenders often require 580 to 620.

Can I get a cash out refinance with a 500 credit score?

It is possible in some cases, particularly with an FHA cash out refinance if you have significant home equity and a strong recent payment history. A score of 500 is below the threshold for most conventional loans, so you would likely need to work with an FHA-approved lender or a portfolio lender.

How much equity do I need for a cash out refinance with bad credit?

FHA and conventional cash out refinance loans generally require you to leave at least 20% equity in the home, meaning the new loan cannot exceed 80% of the home’s value. VA cash out refinance loans may allow up to 100% loan-to-value, but many lenders cap it lower for borrowers with bad credit.

Will a cash out refinance hurt my credit score?

A cash out refinance may cause a temporary dip in your credit score because the lender will make a hard inquiry and you will be replacing an old loan with a new one. Over time, if you make the new payments on time and use the cash to pay down other debts, your credit score may improve.

What are the alternatives to a cash out refinance with bad credit?

Alternatives include a home equity loan, a home equity line of credit, a personal loan, or waiting until your credit score improves. A co-borrower with strong credit can also help you qualify for better terms on a cash out refinance.

Should I use an FHA or VA cash out refinance if I have bad credit?

It depends on your situation. If you are a veteran or active-duty service member, a VA cash out refinance often offers lower costs and more flexible loan-to-value limits. If you are not VA-eligible, an FHA cash out refinance is a common choice for borrowers with credit scores below 620 because it accepts lower scores and only requires 20% equity.