BRRRR - Credit cards and Cash out Refinancing

Creative Real Estate Financing
9yFollow

BRRRR - Credit cards and Cash out Refinancing

Matt Ellis
Pittsburgh, PA · Member since 2015 · 6 posts · 6 votes

Hi All-

I am kicking off my first BRRRR and am looking to fund most of the rehab using credit cards (0% intro rate makes it a lot cheaper than a short term loan ranging anywhere from 7-15%). Risky but I am ok with it.

My one question is when it comes to doing the cash out refinance at about 6 months, I will have a lot of my credit cards and my debt to income ratio will be artificially skewed because of the rehab costs on the cards (but no different than if I had a different lending source....hard money, commercial loan). The intent will be 100% to pay off the credit cards with the refi..  but will the bankers/underwriters be looking at the debt to income ratio and have major concerns? Everything I see about cash out refinances and  related criteria are geared towards owner occupants, not investors. How much does the criteria change if you are fully leased up and cash flowing?

Any insight would be huge! 

thanks in advance!

0Reply
14 views

Most Popular Reply

Jim D.
Investor · United States · Member since 2015 · 415 posts · 487 votes
9y

I would sit down with the lender you want to use for the cash out refi, and review the plan with them. You'll want to see how your DTI ratio and credit score will be impacted by the credit cards.

For the DTI ratio, the monthly payment due on a credit card is usually 1% of the loan balance, so if you have $30,000 on the card, your monthly payment would be $300. You'll want to factor that number in to the total DTI calculation to see if you'll have enough room to qualify for the new loan payment.

With regards to your credit score, that's harder to calculate. If you make the monthly payments on time on the credit card, that won't hurt you at all. However, another major component of credit score is what % of your revolving debt is in use. They like to see less than 20% of available credit utilized. If you're maxed out at close to 100%, that will have a negative impact on your score, though I don't know how much. Your lender may be able to give you an idea.

Hope that helps.

3Reply
See this reply in the discussion

6 Replies

Jump to latestLatest
  • Jim D.
    Investor · United States · Member since 2015 · 415 posts · 487 votes
    9y

    I would sit down with the lender you want to use for the cash out refi, and review the plan with them. You'll want to see how your DTI ratio and credit score will be impacted by the credit cards.

    For the DTI ratio, the monthly payment due on a credit card is usually 1% of the loan balance, so if you have $30,000 on the card, your monthly payment would be $300. You'll want to factor that number in to the total DTI calculation to see if you'll have enough room to qualify for the new loan payment.

    With regards to your credit score, that's harder to calculate. If you make the monthly payments on time on the credit card, that won't hurt you at all. However, another major component of credit score is what % of your revolving debt is in use. They like to see less than 20% of available credit utilized. If you're maxed out at close to 100%, that will have a negative impact on your score, though I don't know how much. Your lender may be able to give you an idea.

    Hope that helps.

    3Reply
  • Austin Fruechting
    Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
    9y

    Since this is your first one, definitely talk to lenders before. You don't want to get stuck not being able to refinance based on those things. A local bank that's a portfolio lender will have a much higher probability of working with you on that. Since they service their loans in house, they don't have check every single box to have the underwriting just right to sell it off. They will be much more likely to look at the situation, understand it, and lend not really counting negatives of the currently high credit balance DTI since they know that will be paid off with the proceeds.

    Safeguard; make sure your worst case is that you finish at a price that you could sell it to another investor and make a little. Then you could build up some cash flipping and not need credit cards the next go around. 

    As far as fully leased up: that depends on the property. If it's a single family house being leased isn't going to change the appraisal/valuation, however it will change you DTI situation. If it's a smaller multi-family the value will be , you'll want to fill at least 1/2 the units and show you're advertising the other unit(s) at the same prices. That will usually satisfy banks on the 2-4 unit buildings, and sometimes even the smaller commercial of 6+/- units

    1Reply
  • Christopher Giannino
    Real Estate Agent · Hamilton, NJ · Member since 2013 · 464 posts · 311 votes
    9y

    I could be wrong here but I believe that your DTI ratio will be impacted tremendously by using credit cards and can potentially screw up the refinancing out part.  I would definitely seek advice from an experienced lender here on BP, as well as, talk to local lenders.

    When you have a fully leased up unit, I believe that most lenders will take into account 75% of the rent. So assuming your PITI is below that 75% threshold you shouldn't have an issue of that mortgage counting towards your DTI ratio.

    Best of luck!  

    1Reply
  • Melvin ListBusiness Member
    Lender · Tampa, FL · Member since 2016 · 1k+ posts · 381 votes
    9y

    @Matt Ellis watch your balance to high credit ratio.  Maxing out your cards will pull down your scores.  I would keep my balance to high credit ratio no more than 35%

    C2 Financial
    WebsiteView Page
    0Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    9y

    This is a question you definitely want to ask a lender, maybe even get preapproved up front if possible so as to mitigate that issue.

    Podcast Guest on Show #121
    0Reply
  • Matt Ellis
    OP
    Pittsburgh, PA · Member since 2015 · 6 posts · 6 votes
    9y

    Thanks all.

    Even with a fully loaded CC my DTI shouldn't be more than .36 which seems to be the healthy cutoff.....and my credit score would still be above the cutoffs!

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free