What do banks see is most detrimental to our credit?

[John H]

We are looking to refinance, and possibly consolidate some debts in 2015, to take advantage of interest rates. These that came about during the recession. We currently have all the cash flow needed to pay and reduce those debts. We can eliminate some of those old debts, but we would like to get rid of the ones banks find the biggest red flags first. We want to be in the position that banks would like to lend us money to make other RE acquisitions. 

Personal credit score is about 700. On that credit score are some old credit card debts as well as an IRS tax bill from 2011-2013. We have a payment plan with the govt and they are paid like clockwork. This IRS debt could be paid off with 3 months of income. The CC debts would take 1.5 months of income. There is also a very large loan at 6% from many years ago that is not providing us interest expense write-off. This would take 16 months income to pay off.

On the business side we have a couple of recent credit lines that were opened up to finance some capital expenditures. 1.5 months income to pay this off. There is a secondary loan to the mortgage, which was used to pay real estate taxes a number of years ago. 6% interest and in good standing. It would take 2 months income to pay this off. There is also past due RE taxes for one year, which would take about 1.5 months to pay off. All other RE taxes are current. We also have our normal mortgage which is in good standing. 

All of our debts combined, if consolidated, would still leave us with a very healthy LTV and DCR.

What debt should we eliminate first in order to improve our standing with lenders. What debts do they not worry so much about?

Thank you for your input, everyone!

[Matt Devincenzo]

I would say based on your post, and without knowing more it is somewhat difficult to say, but I'd go after the CC and business line debts first. 

First if you pay down the 6% debt (16 mo payoff) it may do absolutely nothing to help you with qualifying. That is because if your monthly loan payment is $500, but you are paying it off faster in the underwriting you will still show a $500/mo debt until it is actually retired. To them they aren't seeing how the term is being reduced, just that the payment you owe is $500/mo. Since you're looking to refi this year, the debt won't yet be retired and will still likely count against you for it's full monthly cost. 

The CC and business lines will calculate the monthly payment based on the outstanding balance next month when the statement comes out. This will give you an immediate boost within a couple weeks, and over the next few months you'll have completely retired the debts giving you an even bigger boost. Also these seem to be the ones you can take care of the quickest, again getting you to where you have one less "item" on the list.

For your large 6% loan, I would look at having that paid off at closing with the refinance. This may help you in the underwriting since the bank can look at that debt being retired as part of the closing, and since (again an assumption) you are refinancing this at a lower rate will reduce the payment total which should help the overall picture.