If you have a substantial amount of equity in your home and would like to borrow against that equity, then a cash-out refinance might be something you should look into.
If you have any major expenses coming up, then a cash-out refinance will allow you to leverage your home equity to get the cash you need to meet your financial obligations.
It will, however, raise the overall cost of your mortgage and may even extend the repayment schedule, meaning that you’ll need a few extra years to pay off your mortgage. Your monthly payments will also increase accordingly.
Therefore, you should carefully consider the pros and cons of a cash-out refinance and figure out if it is the right solution for you, keeping in mind your credit score, income level, other financial obligations, etc.
So, let’s dive straight in and find out what cash-out refinancing is all about and what criteria you have to meet in order to qualify for it.
What is a Cash-Out Refinance?
Essentially, a cash-out refinance will replace your existing mortgage loan with a new loan, complete with new repayment terms, monthly payments, and a new interest rate.
The cash-out refinance loan will be for a higher amount than the remaining balance on your previous mortgage. For instance, if your home is worth $200k and you only have $100k left on your mortgage, you can use cash-out refinancing to get a loan of $150k with the house as collateral.
The first $100k of the refinanced loan will go towards paying back your previous mortgage, and you’ll get the remaining $50k in cash, which you can use to fund a home renovation, pay off other high-interest loans, or for any other major expense that you might deem necessary.
Most lenders will only allow you to borrow up to 80% of the current value of your home, including the amount needed to pay off the balance on your previous mortgage. Your creditworthiness, debt-to-income (DTI) ratio and the lender’s policies will determine the actual amount you can qualify to borrow.
Typical Credit Score Requirements for a Cash-Out Refinance
The credit score requirements for a cash-out can vary widely depending on the type of lender you’re working with and the loan program through which you’re applying. But, in general, having a higher credit score will help you qualify for lower interest rates and more favorable borrowing terms.
Most conventional lenders will require you to have a credit score between 620 and 640 to qualify for a cash-out refinance. A government-backed loan – such as one insured by the Federal Housing Administration (FHA) – will have lower credit score requirements. However, most private lenders backed by the FHA will require a credit score of 580 or above to approve your application for a cash-out refinance loan. A few lenders will allow a score of 500.
Apart from your credit score, most lenders will look at your employment history, the value of the property being refinanced, your debt-to-income ratio, and other financial factors when evaluating your loan application. If you’re in good standing vis-à-vis these metrics, then you might qualify for a cash-out refinance even with a relatively low credit score.
What Having a 580 Credit Score Means
Created by the American analytics firm Fair, Isaac and Company, FICO scores provide lenders with a standardized estimate of an individual’s creditworthiness based on an in-depth analysis of their credit reports.
FICO scores range from 300 to 850 and are divided into various categories such as “very poor,” “fair,” “good,” “very good,” and “exceptional” credit. Anything between 300-579 would be considered “poor” credit.
While a credit score of 580 is considered “fair” by most lenders, it falls at the very bottom of the “fair” category and may present some problems when you’re trying to qualify for a cash-out refinance.
As it’s considered a subprime credit score, it may also cause you to get saddled with a higher interest rate even when you do qualify for the refinancing loan.
Therefore, you may want to consider improving your credit score (by making timely payments on your existing loans) before applying for a cash-out refinance. This will allow you to qualify for better loan terms and a lower interest rate, thus reducing the overall cost of your mortgage loan.
Can You Cash-Out Refinance With 500 Credit Score?
Yes, you can qualify for a cash-out refinance insured by the Federal Housing Administration if you have a credit score of 500 or above. The FHA minimum is a 500 FICO score but there are free lenders out there that will approve down to a 500.
So, while qualifying for a cash-out refinance with a 500 credit score is not impossible, it could certainly present a challenge as it’s considered a fairly low score by most lenders. If you have a FICO score of 580 and would like to meet the requirements for a cash-out refinance in 2023, here are some things you should keep in mind:
- You should have been continuously employed for at least two years at the time of applying for the loan.
- There should not be any recent bankruptcies on your credit reports.
- You should not have a debt-to-income ratio higher than 57%, and the lower your DTI is, the better will be your chances of getting the loan.
- Before applying for a cash-out refinance, you should’ve made regular payments on your existing mortgage for at least six months.
- There shouldn’t be any late payments on your existing mortgage.
If you meet these basic requirements (and are working with an FHA-backed lender), you’ll dramatically increase your chances of qualifying for a cash-out refinance with a 580 credit score. However, you’ll have to talk to the lender to find out the actual amount that you qualify for.
Your Options for a Cash-Out Refinance With 500 Credit Score
So, if you’re sure you want to apply for a cash-out refinance with a 500 credit score, here are some of the options you could look into:
FHA Loan
With an FHA-backed cash-out refinance, you can tap into the equity you’ve built up on your home, so long as it is your primary residence and you’ve lived in it for at least twelve months.
To qualify for an FHA-backed cash-out refinance, you’ll need to have made on-time payments on your existing mortgage for a minimum of twelve months. You’ll also need to have at least 20% equity in your home, although a higher percentage would make it easier for you to qualify for a larger loan amount.
You can qualify for an FHA cash-out refinance loan even if your current mortgage is not an FHA loan. You can use the funds received from the cash-out refinance for any major expense, although value-adding home improvements and high-interest debt consolidation are some of the popular ways to use the loan.
You should, however, be the owner-occupant of the home you’re refinancing and be named on the current title as well as the existing mortgage.
USDA Loan
Rural homeowners who took out a mortgage loan backed by the U.S. Department of Agriculture (USDA) can apply for a cash-out refinance loan on the equity they’ve built. To qualify for a cash-out refinance on a USDA loan. However, you’ll need to ensure that your home is located in a USDA-eligible area and is your primary residence.
This could be a good option for borrowers with a low credit score because doing a cash-out refinance on a USDA-backed mortgage doesn’t usually require a new credit review or home appraisal.
The only requirement is that you should have made timely mortgage payments for the last twelve months prior to applying for the new loan. So, it’ll be easier for you to qualify for the cash-out refinance even if you have a credit score of 580, which might have been near-impossible if you were going with a conventional lender.
VA Loan
The VA cash-out refinance is guaranteed by the U.S. Department of Veterans Affairs and available to active-duty service members, veterans, and the surviving spouses of deceased service members (if eligible).
It allows the borrower to refinance their existing mortgage for an amount that is higher than the remaining balance on their loan so that they can receive the difference in cash. You can qualify for a VA cash-out refinance even if your original mortgage wasn’t VA-backed.
The Department of Veterans Affairs has not yet mandated a minimum credit score for VA loans, which can be good news for those with a FICO score of 580 or below.
Apart from allowing you to tap into your home equity, a VA cash-out refinance can also help lower your monthly payments, get rid of expensive private mortgage insurance, and move to a fixed-rate mortgage from an adjustable-rate one.
Non-QM Loan
A non-qualified mortgage (non-QM) loan is a type of mortgage loan that is suitable for people who can’t meet the stringent requirements of a traditional home loan offered by a conventional lender. For example, self-employed individuals, people with non-traditional income sources, and those with poor credit scores can all easily qualify for non-QM cash-out refinance loans.
This is because non-QM loans usually have much more flexible underwriting standards than traditional mortgages. Due to this, however, these loans are considered riskier than traditional mortgage loans and come with higher fees and interest rates. However, non-QM refinance loans will be available to you even if you have a credit score as low as 550.
Unlike FHA cash-out refinance loans, you can get a non-QM loan even if you have multiple late payments on your existing mortgage over the last 12-month period. You can even qualify for a non-QM cash-out refinance if you had a bankruptcy or foreclosure in the last 24 months.
Other Things to Keep in Mind When Refinancing with Bad Credit
When considering a cash-out refinance with a poor credit score, the first thing you need to examine is the impact this will have on your credit as well as your finances.
A cash-out refinance may help lower your interest rate and monthly mortgage payments. On the other hand, it’ll impact your credit score as potential lenders will conduct hard inquiries on your credit reports when reviewing your loan application.
While you will receive a lump sum amount in cash, the refinancing might incur high closing costs and lead to a longer loan repayment term. Still, it might be worth it if you use the cash for high-interest debt consolidation, value-adding home improvements, or any other area that will strengthen your financial position in the long term.
If you don’t need the cash immediately, you could also choose to wait a few months or years to let your credit score improve before applying for a cash-out refinance, as this will allow you to take advantage of better loan terms and a lower interest rate.
Where to Get a Cash-Out Refinance with a 580 Credit Score
If you’re considering a cash-out refinance and have a credit score of 580 or higher, Mutual of Omaha Mortgage can help simplify the process. They have government-backed mortgage options for individuals who have a lower credit score. Plus, their team understands the challenges that may come with lower credit scores and is dedicated to finding solutions that work for you. Whether you’re looking to consolidate debt, fund home improvements, or access cash for other financial needs, Mutual of Omaha Mortgage is equipped to guide you through the cash-out refinance process.
Reach out to Mutual of Omaha Mortgage today by filling out this form and connecting with a loan officer who can provide expert advice tailored to your circumstances. Take the leap towards financial flexibility and explore how a cash-out refinance can work for you with the support of Mutual of Omaha Mortgage.
