Refinance and HELOC with bad credit: 2026 guide

If your FICO sits below 680, the mortgage market does not lock you out. It charges more, asks for more equity, and rewards homework. The average HELOC rate hit 7.26% in May 2026 and that is the rate for borrowers with strong files. Sub-680 borrowers pay a premium on top, but the gap to a credit card at 21.00% APR or a 24-month personal loan at 11.40% APR is still wide enough that secured borrowing usually wins.

This guide walks through what counts as “bad credit” in mortgage underwriting, which refinance programs accept sub-680 files, which HELOC structures do, and how to close the gap on your score before you apply. It covers Texas and Colorado specifically, since Chestnut lends in both. Rates and terms depend on full credit profile, not score alone.

What counts as “bad credit” for a mortgage

Lenders price off FICO score, but the cliff is not at one number. The Consumer Financial Protection Bureau notes credit scores run 300 to 850, and that “a higher score makes it easier to qualify for a loan and may result in a better interest rate or loan terms.” Most mortgage programs use the middle of your three bureau scores (Equifax, Experian, TransUnion).

For pricing and program access, the industry tiers look like this:

FICO band	Mortgage label	Programs typically open
760+	Excellent	Best conventional, jumbo, all FHA and VA
720 to 759	Very good	Strong conventional pricing
680 to 719	Good	Standard conventional, all government
640 to 679	Fair	Government loans, some conventional
580 to 639	Subprime / fair	FHA at 3.5% down, FHA cash-out, VA, USDA
500 to 579	Poor	FHA at 10% down only
Below 500	No agency option	Manual / non-QM with significant overlays

For most homeowners considering a refinance or HELOC in 2026, “bad credit” practically means below 680. That is where conventional pricing starts to hurt and where some non-agency HELOC lenders draw their line. It does not mean you have no options.

Compare current Texas and Colorado rates with no credit pull before you decide whether refinancing or a HELOC fits your situation. A soft inquiry will not move your score.

Refinance options for sub-680 credit

The four programs below all accept sub-680 files. The right one depends on your existing loan type, how much equity you have, and whether you need cash out.

FHA Streamline Refinance (existing FHA loan only)

The FHA Streamline is the most forgiving refinance product in the market. If your current loan is already FHA-insured, you can refinance to a lower rate without a new appraisal, full income re-verification, or in some cases any credit pull at all.

Key rules from HUD’s single-family handbook:

• Existing loan must be FHA-insured
• Current on payments (no 30-day lates in the past 6 months, no more than one in 12 months)
• 210-day seasoning from the original FHA loan closing
• Net Tangible Benefit required (rate or payment reduction meeting HUD thresholds)
• No cash out beyond $500

Tradeoff: you keep paying FHA’s Mortgage Insurance Premium (MIP), and the upfront MIP rolls into the new loan. The CFPB notes that mortgage insurance is required for all FHA loans, so you cannot drop it the way you can drop conventional PMI at 20% equity. If your goal is to cut MIP, you need a conventional refi (and a 620+ score).

FHA Cash-Out Refinance

If you have an existing FHA loan or a conventional loan you want to roll into FHA pricing, the FHA cash-out can pull equity out at lower credit minimums than conventional cash-out. The 580 FICO floor for 3.5% down purchases does not apply to cash-out; FHA cash-out has tighter minimums and most lenders set their own overlay at 600 to 620 FICO.

What FHA cash-out delivers:

• Up to 80% LTV cash-out (was 85% before the 2019 HUD reduction)
• One unit primary residence required
• 12-month seasoning, 12 months of on-time payments on the existing mortgage
• Full appraisal and full income re-verification
• New MIP attaches to the new loan

For a Texas borrower with 70% LTV and a 620 FICO, FHA cash-out is often the cheapest path to equity when a conventional cash-out denial sits in the file. Note the Texas 2% fee cap under Finance Code Chapter 343 applies to FHA cash-out in Texas, capping lender and broker fees at 2% of the loan amount excluding third-party costs.

VA IRRRL (existing VA loan only)

The Interest Rate Reduction Refinance Loan is the most streamlined refinance in the country. The VA explicitly states “no appraisal or credit underwriting package is required when applying for an IRRRL”. There is no minimum credit score from the VA, although individual lenders will set overlays (often 580 to 620 FICO).

Requirements per the VA’s IRRRL page:

• Existing VA loan
• Refinancing to a lower rate (or ARM to fixed)
• Certificate of Eligibility (your lender pulls this electronically)
• Must have occupied the home previously
• No cash out beyond modest closing-cost financing
• Funding fee applies unless exempt; can roll into loan

If you have a VA loan and your score has dropped since you bought, the IRRRL is almost always the answer. It does not solve cash-out needs.

VA Cash-Out Refinance (existing VA loan or eligible veteran)

Unlike IRRRL, the VA cash-out runs full underwriting and requires an appraisal. Lender overlays typically start at 580 to 620 FICO. The VA allows up to 100% LTV cash-out at the program level (the most aggressive of any major program), though most lenders cap at 90%.

Tradeoff: the VA funding fee on a cash-out runs 2.15% to 3.3% of the loan amount for non-exempt veterans. That eats into the equity you pull out. Run the breakeven before deciding.

See whether a VA cash-out beats a HELOC for your situation. Chestnut’s online comparison shows both side by side before you commit.

HELOC and home equity loan options for sub-680 credit

HELOCs are second liens, so they sit junior to your primary mortgage and price higher. The average HELOC rate is 7.26% as of May 2026, and Bankrate notes “680 has historically been the standard, but some lenders accept lower scores nowadays.”

Three structural points matter when you have sub-680 credit:

Lender minimums vary more than you think

A 640 FICO file gets a “no” at one credit union and a “yes” with a rate adjustment at the next. Common minimums in 2026:

Lender type	Typical HELOC minimum FICO	Rate adjustment for sub-680
Big bank	680 to 700	Often declined
Local credit union	660 to 680	+0.50% to +1.00%
Fintech (digital)	640 to 660	+0.75% to +1.50%
Alt-doc / non-QM	580 to 620	+2.00% or more

A 640 to 679 file is the borderline zone. You will get declines, but you will also get approvals. The price gap between best-in-class and “willing to lend” can be 200 to 250 basis points, so shopping matters more here than at any other credit tier.

Equity has to do the work credit does not

Bad-credit HELOCs lean harder on combined loan-to-value (CLTV). The cleanest sub-680 approvals tend to have 70% CLTV or lower. At 80% CLTV with a 640 FICO, you are running against tighter overlays. At 85% CLTV with a 640 FICO, most agency-aligned lenders pass entirely.

Concrete math: a Texas home worth $400,000 with a $240,000 first mortgage (60% LTV) leaves about $80,000 of equity at 80% CLTV. Even a 640 FICO borrower can usually access most of that through a HELOC, though the rate will run 1 to 2 points above the headline 7.26% average.

Alt-doc lenders exist but read the fine print

Non-QM HELOC lenders (Spring EQ, Figure on certain products, some regional banks) will accept files below 620 FICO, but the rate adjustment can be steep and prepayment penalties are more common than in agency products. For Texas borrowers, remember the 2% fee cap under Finance Code Chapter 343 applies to home equity loans and cash-out refinances, but the cap excludes third-party costs like title insurance and appraisal.

For a deeper comparison of HELOC structures, see Chestnut’s guide on fast HELOC approval with bad credit strategies.

Improving credit before you apply

The CFPB’s official credit-improvement guidance is the right starting point. Six concrete steps:

1. Pay every loan on time, every time. Payment history is the single largest factor in FICO scoring. Set up automatic payments or electronic reminders.
2. Keep credit utilization under 30%. The CFPB explicitly recommends using “no more than 30 percent of available credit.” For a 720+ stretch goal, target under 10%.
3. Build a longer credit history. Older accounts in good standing lift your score. Do not close old cards just because you do not use them.
4. Limit new credit applications. Multiple hard inquiries in a short window signal financial stress and ding your score.
5. Review your credit reports for errors. Pull all three bureaus free at annualcreditreport.com and dispute anything inaccurate.
6. Consider secured cards or credit-builder loans if you are rebuilding from a thin file.

Realistic timelines:

Starting score	Target score	Typical timeline	Driver
580	620	30 to 90 days	Utilization cleanup, dispute errors
620	660	3 to 6 months	Payment history, balance transfers
660	700	6 to 12 months	Age of credit, mix, no new inquiries
700	740	12 to 24 months	Consistent low utilization + history

Chestnut clients regularly close a refinance or HELOC at one score and refinance again 12 to 18 months later at a meaningfully higher score. The strategy is not “wait until 760” but “qualify once, optimize later.”

Texas-specific notes

Texas treats home equity differently than any other state.

• Texas Constitution Article XVI Section 50(a)(6) governs all home equity loans and cash-out refinances on a primary homestead. Once a loan is a 50(a)(6) loan, it is always a 50(a)(6) loan, and you cannot convert it back to a non-equity loan in a future refinance without specific procedures.
• 80% CLTV maximum on all Texas home equity loans and cash-out refinances, including FHA and VA cash-out in Texas. There is no 90% or 100% cash-out in Texas, period.
• 2% fee cap under Texas Finance Code Chapter 343 on lender and broker fees for home equity loans and cash-out refinances. Third-party costs (title, appraisal, recording) are excluded from the cap.
• 12-day waiting period between application and closing on Texas home equity loans.
• HELOCs in Texas are technically allowed as second-lien 50(a)(6) loans, but the structure is more restrictive than in other states. Some national HELOC lenders do not offer Texas HELOCs at all.

If you are a sub-680 Texas borrower, the FHA cash-out is often the cleanest path. Combine it with the TDI refinance title insurance discount (50% off basic premium within 4 years of purchase, 25% off between 4 and 8 years) and you can substantially cut closing costs.

Colorado-specific notes

Colorado is permissive by comparison.

• No state cap on home equity LTV beyond what individual programs set. Conventional cash-out in Colorado caps at 80% LTV per Fannie Mae and Freddie Mac; VA cash-out can go higher with lender approval.
• No state fee cap equivalent to Texas Chapter 343.
• No mandated waiting period between application and home equity loan closing beyond the federal three-day rescission for refinances.
• HELOCs widely available from credit unions (Bellco, Elevations, Ent), regional banks, and fintechs.

For sub-680 Colorado borrowers, the practical advantage is broader lender selection. Where a Texas 640 FICO file might see three usable HELOC lenders, the same Colorado file might see eight. Use that to shop aggressively.

See Chestnut’s Colorado HELOC and refinance options when you are ready to compare actual quotes.

Honest tradeoffs

Sub-680 borrowing is more expensive borrowing. The honest version of this conversation includes:

• Rates run 50 to 250 basis points above best-pricing tiers. That is real money over 30 years.
• Fees can be higher. Some lenders bake adverse-credit pricing into points or origination fees rather than rate, which makes APR comparison essential.
• Equity matters more than usual. Below 680 FICO, lenders want to see strong CLTV (70% or lower). If you are at 85% CLTV with bad credit, you have fewer options.
• Mortgage insurance often sticks. FHA MIP for the life of the loan on cash-out; conventional PMI until you hit 20% equity (or refinance into a non-PMI product).
• Approvals are not guaranteed. Some files do not qualify under any current program. The honest answer in that case is to improve credit first, not to chase non-QM lenders charging 10%+ rates.

Rates and terms depend on full credit profile, not score alone. Two borrowers with identical 640 FICO scores can see meaningfully different offers based on debt-to-income, employment history, reserves, and how the late payments on the file are distributed in time.

More bad-credit mortgage guides

• How to get a HELOC fast with bad credit in 2026
• Minimum credit score for an online home equity loan in 2026
• Qualify for a home equity loan with a 550 credit score in 2026
• 30-day credit score sprint: 580 to 620 for Chestnut AI refinance
• Credit score vs mortgage rate: how 20 points saves $60,000

Frequently Asked Questions

What is the lowest credit score that can refinance a mortgage?

For an FHA Streamline Refinance on an existing FHA loan, there is no required credit score from HUD, although most lenders set an overlay at 580 to 620 FICO. For a VA IRRRL, the VA itself does not require credit underwriting, but lender overlays typically start at 580 to 620. For conventional and cash-out refinances, practical minimums start at 620 FICO with significant pricing adjustments below 680.

Can I get a HELOC with a 600 credit score?

Yes, with a smaller pool of lenders. Big banks usually require 680 to 700 FICO for a HELOC. Credit unions and fintechs go down to 640 to 660. Alt-doc and non-QM lenders accept 580 to 620 FICO, though rate adjustments and equity requirements tighten significantly. Combined loan-to-value at or below 70% strengthens a sub-680 file substantially.

Does an FHA Streamline Refinance check credit?

The FHA program does not require a new credit underwriting package on a Streamline Refinance, but individual lenders typically run a credit report and apply overlays. You also have to be current on payments with no 30-day lates in the past 6 months and no more than one late in 12 months. A 210-day seasoning from your original FHA closing is required.

What is the minimum credit score for an FHA cash-out refinance?

HUD does not publish a single minimum credit score for FHA cash-out, but most lenders set overlays at 600 to 620 FICO. The maximum LTV is 80% of appraised value (reduced from 85% in 2019). FHA cash-out is one unit owner-occupied only, requires 12 months of on-time mortgage payments, and runs a full appraisal and income re-verification.

Can I refinance my VA loan with bad credit?

Yes. The VA IRRRL does not require credit underwriting at the VA level, though individual lenders set overlays (commonly 580 to 620 FICO). For a VA cash-out, full underwriting applies and overlays start around 580 to 620 FICO depending on lender. The VA funding fee on cash-out runs 2.15% to 3.3% of the loan amount for non-exempt veterans.

Is it worth refinancing with bad credit?

It depends on the math. A refinance from a high-rate FHA loan to a slightly lower rate via FHA Streamline often pencils even at sub-680 credit because the costs are minimal and the program is forgiving. A conventional cash-out at 640 FICO with significant pricing adjustments may not beat a HELOC at the same score. Always run the breakeven (closing costs divided by monthly savings) before committing.

How much equity do I need for a HELOC with bad credit?

Most sub-680 HELOC approvals require combined loan-to-value at or below 80%, and the cleanest approvals tend to be at 70% CLTV or lower. In Texas, the constitutional 80% CLTV cap on home equity products applies regardless of credit score. In Colorado, individual lender programs set the cap, usually 80% to 85%.

What is the fastest way to improve my credit score before applying?

Paying down revolving balances to under 30% utilization typically delivers the fastest gains. The CFPB recommends “no more than 30 percent of available credit,” and many borrowers see 20 to 40 point increases within 30 to 60 days of cleaning up utilization. Disputing inaccurate items on your credit reports is the other fast lever. Avoid opening new accounts in the 90 days before applying.

Sources

1. Consumer Financial Protection Bureau: What is a good credit score?
2. Consumer Financial Protection Bureau: How do I get and keep a good credit score?
3. Consumer Financial Protection Bureau: FHA loans
4. HUD: Streamline Refinance program page
5. VA: Interest Rate Reduction Refinance Loan (IRRRL)
6. VA: IRRRL eligibility and process
7. VA: Funding fee and closing costs
8. Bankrate: Current HELOC rates
9. Federal Reserve G.19 Consumer Credit Release
10. Texas Finance Code Chapter 343
11. Texas Department of Insurance: Title insurance R-8 refinance discount