Banks talk about credit scores as if they are a verdict. In practice, a 602 FICO does not slam the door on a cash out refinance. It changes the price, the paperwork, and sometimes the lender you need to call. For homeowners with a score between 580 and 619, the question is not whether a cash out refinance with bad credit exists. It is whether the math still works after fees, mortgage insurance, and a higher rate.
What lenders mean by bad credit for a cash-out loan
Mortgage underwriting is not one score cutoff. A conventional cash-out usually needs a 620 FICO, an 80% maximum loan-to-value ratio, and a debt-to-income ratio that leaves room for the new payment. At 620 to 639, you may qualify, but the lender adds a pricing adjustment. That can show up as a higher rate, extra points, or both.
FHA is more forgiving on paper. The program allows scores down to 500 for some cash-out loans, though most FHA lenders set their own floor at 580 or 620. VA cash-out has no official minimum score, but individual VA lenders often require 580, 600, or 620. Non-QM lenders can go lower, sometimes to 500 or 550, in exchange for a rate two or more points above a prime borrower’s. The cash out refinance credit score guide breaks down the tiers by loan type and shows where the price jumps.
The routes that still work when your score is bruised
FHA cash-out refinance
If you already have an FHA loan or can qualify for one, FHA cash-out lets you borrow up to 80% of the appraised value. The credit floor is lower than conventional, but the trade-off is mortgage insurance. On a $250,000 loan, annual MIP might run about $1,375 to $2,125 depending on term and LTV. That cost matters when you are already paying a higher rate.
VA cash-out refinance
Eligible veterans and surviving spouses can sometimes refinance up to 100% of the home’s value with a VA cash-out. There is no monthly mortgage insurance, but there is a VA funding fee, usually 2.15% to 3.3% for a cash-out refinance unless you are exempt. A 600 score may be fine at one VA lender and rejected at another, so call three or four.
Non-QM or a co-borrower
Portfolio and non-QM lenders look at bank statements, assets, or equity rather than a perfect score. They are useful if you are self-employed or have a recent credit event. A co-borrower with a 720 score can also pull a joint application into conventional territory, but the co-borrower is on the hook for the loan. That is a family decision, not a paperwork trick.
How much cash you can actually pull
Most bad-credit cash-out loans cap you at 80% of the appraised value. Some lenders reduce that to 70% or 75% when the score is below 620. Say your home appraises at $350,000 and you owe $210,000. At 80% LTV, the new loan can be $280,000. Subtract the old mortgage and you have $70,000 before costs. Closing costs and fees of $7,000 to $10,000 leave roughly $60,000 to $63,000 in cash.
VA cash-out is the exception. It can go to 100% of value, though you still cover the funding fee and lender fees. The cash out refinance loan to value explainer shows how a 5% LTV change can wipe out $17,500 of available cash on a $350,000 home. Use a cash out refinance calculator with your actual mortgage balance, not a rough estimate from Zillow.
What bad credit costs in real dollars
On a $240,000 loan, a 7.25% rate carries a principal-and-interest payment of about $1,637. At 8.5%, the payment is about $1,846. That is $209 more every month, or $12,540 over five years. Over 30 years, the difference is more than $75,000. You may also pay 1 to 3 points at closing, and points are prepaid interest.
Closing costs on a refinance typically run 2% to 5% of the loan amount. On $240,000, that is $4,800 to $12,000. Ask for a Loan Estimate and compare the services you can shop for. The cash out refinance closing costs breakdown lists fees worth challenging, including appraisal, title, and origination charges.
Where a bad-credit cash-out goes wrong
The most common mistake is using home equity to pay off credit cards without changing the behavior that ran them up. Moving $30,000 of 24% card debt into a 9% mortgage can save $375 a month. It also turns unsecured debt into secured debt. If you lose a job, a card company cannot take your house. The mortgage lender can. The 30-year trap of paying off credit cards with a cash-out refinance explains why a shorter repayment plan or a partial payoff often beats a full consolidation.
Home improvements are a better fit when the work protects the value of the house: a roof, electrical panel, or accessibility ramp. A pool or luxury kitchen rarely returns the cost at resale. If the project does not add value or reduce a real risk, a high-rate cash-out loan is an expensive way to fund it.
How to improve your approval odds before you apply
Pull your credit reports from all three bureaus at AnnualCreditReport.com and dispute anything wrong. A collection account reported twice can drop a score by 20 to 40 points. Pay down revolving balances below 10% of the limit if you can. On a $5,000 card, that means a balance under $500. Do not close old cards; the age of your accounts helps.
Ask about manual underwriting. FHA and VA both allow it, and a human underwriter can weigh a strong rental history or a stable 12-year job against a medical collection. If you are six months from a 620 score, waiting may save more than the cash is worth right now. A 1.5% lower rate on $240,000 saves about $250 a month.
Shop at least three lenders within a 45-day window. Mortgage inquiries in that window usually count as one for scoring. Credit unions, mortgage brokers, and community banks have different overlays. One may reject a 590 score while another approves it with more equity or a co-borrower.
Questions to ask before you sign
- Is this a conventional, FHA, VA, or non-QM loan, and what is the exact interest rate without points?
- What are the total closing costs in dollars, including appraisal, title, origination, and recording fees?
- Will mortgage insurance be required, and what is the annual premium?
- What loan-to-value ratio are you using, and is it based on a full appraisal or an automated value?
- What debt-to-income ratio did you calculate, and does it include taxes, insurance, and HOA dues?
- Is there a prepayment penalty, balloon payment, or call feature?
Get those answers in writing on a Loan Estimate. Before you sign, compare the new mortgage payment to your current payment plus the minimum card payments. If the new payment is $1,846 and you were paying $1,200 on the mortgage plus $600 in cards, the cash-out saves nothing and adds foreclosure risk. That is the test that matters.