1 stage or 2 stage refinance?

Question

I want to do a cash out refinance and was wondering if I should it it two stages. Goal is to pull out as much cash as possible to use towards next deal.

-Credit score is around 625. It’s low due to high utilization (>50%) of available credit, otherwise on time payments and no derogatory marks.

-Credit card debt $100k

-Bought a multi-unit property in 2015, live in one unit, and did major renovations funded in part with credit cards.

-I’ve been doing Airbnb on the remaining units for the last 3 years when they weren’t being renovated. They now pull in approx. $80k in total revenue per year.

-Work full-time at W2 job, ~$150k annual income

-Currently owe $600k on mortgage, 4.00% interest rate on 30 yr fixed

-Have large higher education debt, currently paying on Income Based Repayment (IBR) plan.

-Estimated property worth $1.8mil

-I’d like find a lender who can work with Airbnb income AND IBR. Any recommendations?

Should I:

1) 2 stage: take out a HELOC loan now to pay all credit card debt off. Then do full refinance with cash out soon after. I'm hoping my credit score will improve after paying the credit card debt off so I can get a lower interest rate. Should I pay off the heloc at that point since refinance interest rate is lower?

2) 1 stage: do a full refinance with cash out right now with my 625 credit score.

3) something else?

Thanks in advance.

Nicholas Covington · Answer

@Jesse Lee good question. A personal loan is normally a unsecured line of credit that an institution can loan out. Such as lending club, best egg, upstart, etc. The only “bad” debt that is considered in a credit score is high revolving debt...aka credit cards. Installment loans only negatively impact your credit in one of 3 ways. 1. When the account is opened...due to the hard inquiry. 2. When you become late or delinquent on the debt. 3. When you pay off the account and it is now considered “closed.”1 and 3 are petty impacts and do not outweigh the benefit of what you took it out for.

Jesse Lee · Answer

@Nicholas Covington & @Chris Mason Thank you both for your insightful responses. Pardon my ignorance but what do you mean by a personal loan? Is that a loan I would get from a bank, credit card company or a Lending Club type institution? Won’t that negatively impact my credit score since it’s trading one type of debt for another? Or do you mean reach out to friends or family to personally loan me money (and not have it tied to my social security)?

Nicholas Covington · Answer

@Jesse Lee your consumer credit card debt is what’s keeping you low. Installment accounts such as your student loans and mortgage do not lower your score or adversely affect it unless you have been late or it’s in a derogatory status. In fact with that amount of debt and on time payments they are actually helping your score.As Chris mentioned paying off that much debt with say a personal loan would boost your score up quite a bit, of course this would be more effective if there are no other blemishes on your credit profile.You could take out the personal loan to pay down off the debts and then use a HELOC to pay off the personal loan. Normally the heloc would be at a lower rate then the personal loan.

Chris Mason · Answer

Typically about a month. Paying that much debt off may very well bump your FICO over 700, which is a typical HELOC lender's requirement.

Jesse Lee · Answer

@Nicholas Covington Appreciate your response. I'm in California.Airbnb provides revenues statements (I have access to all 3 years). I paid taxes on the income and they tracks losses / expenditures as well from remodeling.All the debt break down: Consumer credit card debt is $100k. Credit card limits is ~200k, so 50% utilization.Student loan debt is $400k. Doing IBR payments about $800/month. Mortgage debt is $600k.If I paid off the $100k credit card debt now, any idea how long it will take my score to go up? Will it go up by a lot or is the mortgage & student loan going to keep it down?

Chris Mason · Answer

Not going to get a HELOC.Will be a cash out refi followed by a rate/term refinance in six months once your FICO jumps up into 700s.

Nicholas Covington · Answer

@Jesse Lee Hello. First I would like to ask what state are you in?Secondly I will say a cash out with a 625 credit score will be very hard on your rate wise especially for a multifamily home, might want to work on that first because you are looking for a jumbo loan and they require upwards of 660+ normally 720+ credit score.Since you have a good income already, might I suggest you take out a personal loan and consolidate your debt first to raise your score. Assuming that you comment about >50% is consumer credit and not your student loans. This should put you in a better spot since it will be an installment account.For Airbnb to be used, I hope you have some proof of income for that specifically showing on tax returns otherwise the chances of you being able to use that is slim to none. Since I have not used that type of income before as a mortgage broker, I am not sure what proof they truely would need. Maybe 24 months of bank statements... but making 80k a year and not giving to uncle sam is a no no for conventional type loans for the most part. For IBR that's pretty simpe, you will just want to make sure you quilify for a normal conventional fannie/freddie loan.