BRRRR - Credit cards and Cash out Refinancing

[Matt Ellis]

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!

[Jim D.]

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.