Maintaining Credit While Using the BRRRR Method

[Ryan Collins]

So I threw the idea out to my father about BRRR'ing out his home to get a jumpstart with his investing career. He's got a very nice home in a Cleveland suburb that he owes roughly $55k on and it would appraise probably around $135-150k (my conservative guess based upon a comp up the street from him selling for $170k that has newer updates and finishes). He renovated the home fully in 2009/2010 and does a very good job keeping it up, adding new things periodically, etc. He's looking to rent the home out and move in the near future.

He's interested but highly apprehensive because he fears what the refinance portion will do to his DTI%. He definitely has a valid concern about refinancing and how it will lower his credit score for anything he needs to use credit on. Unfortunately I couldn't answer how it's possible to BRRRR and maintain your credit for him so I'm hoping someone here can give some insight in how to BRRRR and maintain a decent credit score. Or at least something on your experiences. Anything is appreciated. TIA!

[Stephen Akindona]

Hey @Thomas J. Clifford, DTI is a measure of your debt obligation against your monthly income. What creditors do is add up your total monthly debt obligation divided by your monthly income. For example if you have $1000 of monthly payments and you get paid $2000, you have a DTI of 50%. So if you purchase a cash flowing asset that pays you $200 a month after debt service now when the same creditor looks at your file you look like $1,000 a month in debt payments and $2200 a month in income. The rental income offsets the debt! now your DTI is 45% thus improving. The lower this number the better. Don't quote me on this but I think that most lenders need you DTI to be 45% or lower to get approval. Essentially once you qualify for the first refi you qualify indefinitely. Well assuming that you always buy properties that cash flow and that you don't increase your debt that shows up on your credit report (personal home mortgage, car notes, credit cards, etc) I hope that makes sense!

That maybe an over simplification of the process, so hoping a mortgage guy can jump in on this!