Does it hurt credit to constantly BRRRR?

18 Replies

Hi everyone!

I am looking to do a good amount of BRRRR deals this year, but was wondering how it works with credit since you're constantly refinancing and pulling credit.

How do you protect your credit while being very active in real estate investing? Thanks!

@Aimee Tarte yes it does ding you, but at the end that is what the score is about - it measures your exposure and risk to a lender based on your financial behaviour. Not much you can do about it, even if you go with a commercial loan they will still run your credit. Get an app like CreditKarma and make sure you are doing well in all other categories that impact your score. The impact from a real estate mortgage is less then you may think and as long you can get your refi loans I would not worry about it too much.

Be careful with mortagge payments though, one missed payment may cost you 50 to 100 points and will stay on your credit for years. I have been BRRRR a lot for over 10 years and had that happen to early on when a loan got sold to Chase Bank and I had a typo in the autopay (my mistake) - and was travelling overseas when the letter came. Even though I could show that the autopay was set up and the account was well funded, they would not remove the entry on my score (which is totally in their hands). Since that day I authorize all lenders to deduct the payment, so it is their and not my respsonibility.

@Aimee Tarte

Commercial financing does not hurt your credit. The mortgage is under your entity (LLC) and will not show up on your credit report. They will run your credit, but will only run it once a year. The difficulty with the refinance part of BRRRR is when you use residential loans your credit and DTI are effected. You'll most likely need to go slow or use commercial financing.

@Aimee Tarte as mentioned above this is going to be dependent on what loan type you are using. Some loans don't care about your credit.  It will also depend on what your credit is like.  I check my credit multiple times per year and it's fine.  Someone with a 620 credit score should be VERY careful about their credit being pulled.  Generally speaking if you do have your credit pulled for a mortgage the credit report is good for 3-4 months.  So even then you should only need it pulled 3 or 4 times max. Hope this helps in some way.

@Ben Schembri your dti should not go up by a lot as long as your mortgage payments on your rentals are lower than your rents. If a house is rented at 1000 per month and your mortgage payment is 750 per month, you dti does not increase at all. You can do this until you have maxed out on the number of mortgages you can get in your name. Now there are lenders that do not look at a investors overall dti and just look at the rents compared to the mortgage payment of the subject property.  

@Gordon Cuffe Correct me if I'm wrong but that sounds like it's dependent on you using a commercial loan, right? It would make sense to me that if a person wasn't doing their investing through a business entity that it could affect their DTI and thus their ability to take on more debt.

Even if your projected rental income is included in the calculation it seems unlikely to me that you'd be able to find a property that cashflows enough to not affect your DTI.

I guess to provide a more specific example say your current DTI is 25% ($2000/month with $500 in debt).If you were to buy a house that rents for a $1000/month and the mortgage payment is only $750, that brings your monthly income up to 3000/month and your monthly debt to 1250 so your DTI would jump to ~42%.

Obviously that is a drastic example because that is not much income to start so the change is more drastic than I imagine would be for most on this website, but still the change is still there.

@Ross Gleason I was referring to conventional loans. Your calculations are incorrect when referring to underwriting a non owner loan. If lenders used your formula ,we would never get non owner financing. Here is a example. If a person has a gross income of 6k per month and his primary residence payment is 1800 per month. That is 30% housing dti. lets say he has a car payment and credit card payment at $400.0 per month then his total dti is 36%. That person wants to buy a rental house at 150k with a total piti payment of $900.0 per month and the house rents for $1200.0 per month. The lender will use 75% of the rental income as income towards the payment. 75% of 1200 is 900. The 900 per month offsets the additional 900 per month liability so he easily qualifies. If that person was purchasing a house with a 1200 per month payment that rents for 1200 per month then he would get hit with 300 per month in debts on top of the 2200 per month. His debt to income ratio would be 41%. A lender would probably approve that loan, but if he wanted to purchase a house with those same numbers again, they would probably decline it because his dti would go up to 46%. I've been working for a mortgage broker for a long time and that is how it always how it has been. I just cant believe that a person can get a FHA 30 yr fixed rate at 2.75% right now because of the drop in interest rates.

@Gordon Cuffe I apologize for all the questions but the information that I had found about getting conventional loans alluded toward them working more like I was describing. I understand why it doesn't work like that and I'm able to follow your math there until you get to the unit that rents for 1200. Why would they get hit with an extra $300 in debts, and where does the 2200 number come from?

I appreciate the patience with me as I'm still learning. And just to provide some context behind my thinking, it would make sense to me that a bank wouldn't want to offer a loan to someone based on projected rental income because it's just that projected and not established income. Which is why I had thought this was for a commercial loan.

@Aimee Tarte - depends on how many you do in 1 year.  Your credit gets temporarily dinged but goes back up after a couple months.  Also, depending on what you have in your name related to the business (loans, credit cards etc) it can help you as well.  Credit agencies place value on having varied lines of credit (car loans, credit cards, mortgages) and also the percent you are using of the available limits.  I'm a very active investor and have grown my rental portfolio over the years without hurting my credit much.  It stays within a pretty tight range but as @Marcus Auerbach mentioned, I have the Credit Karma app on my phone and I pay very close attention to when my different accounts report (fyi - it's not the closing date on your statement).  I always make sure to make payments right before they are about to report to get the lowest possible balance, if any, on each card.  It also allows you to monitor anything unusual so you can jump on it right away.  Also, as you grow you may look toward lenders that don't require W2s or tax returns.  These are the types of lenders that I use and have built strong relationships with.  Once you're in the low to mid 700's you're in their top bracket in terms of their rates.  And it's not too hard to hit those scores if you pay attention.

@Aimee Tarte

I did 19 commercial loans in under 2 years. 10 show up on my credit report and 9 do not. I had an 820 credit score at the beginning, now it's between 760-780. 


Not sure if that helps, but basically I don't worry about it.

Originally posted by @Gordon Cuffe :

@Ross Gleason I was referring to conventional loans. Your calculations are incorrect when referring to underwriting a non owner loan. If lenders used your formula ,we would never get non owner financing. Here is a example. If a person has a gross income of 6k per month and his primary residence payment is 1800 per month. That is 30% housing dti. lets say he has a car payment and credit card payment at $400.0 per month then his total dti is 36%. That person wants to buy a rental house at 150k with a total piti payment of $900.0 per month and the house rents for $1200.0 per month. The lender will use 75% of the rental income as income towards the payment. 75% of 1200 is 900. The 900 per month offsets the additional 900 per month liability so he easily qualifies. If that person was purchasing a house with a 1200 per month payment that rents for 1200 per month then he would get hit with 300 per month in debts on top of the 2200 per month. His debt to income ratio would be 41%. A lender would probably approve that loan, but if he wanted to purchase a house with those same numbers again, they would probably decline it because his dti would go up to 46%. I've been working for a mortgage broker for a long time and that is how it always how it has been. I just cant believe that a person can get a FHA 30 yr fixed rate at 2.75% right now because of the drop in interest rates.

Still am pretty sure debt to income gets hurt from this example. Say my current monthly debt is 2k and my current monthly income is 5k, DTI=40%. Purchase the property from your example and now monthly debt increases to 2.9k and monthly income increases to 5.9k, new DTI=49%

I believe to do this strategy numerous times you would a.) need to get smoking deals or b.)have a high monthly income

 

@William German What would be the purpose in this? If you're spending the money build a house, it seems like spending all that effort to only leave the house in a distressed state that would make it attractive to flippers would be a bit of a waste. Especially considering it seems like if you're already putting that capital down to make this happen why not finish the house and make the profit the flipper would make yourself?

Thinking about this response I think I may have misinterpreted what you were trying to say but I would love to hear your thoughts on why this may or may not be a good idea just to gain some perspective.

@Ben Schembri That's exactly why I thought these may be commercial loans or a loan that's being leveraged against business assets instead of an individual person. Because what I've read on the subject makes it seem like loans to a business care much less about your personal DTI and more about the ability of the business to cash flow, where as a loan to an individual would want to make sure you had the padding in your personal income to make the payments regardless of if it's rented or not.

And even though I'll admit that I am still dedicating a lot of time to learning and likely spend more time on here than most I would really like to hear from @Gordon Cuffe about what specifically makes up that difference, because I imagine there's something here I'm missing and would love to correct my thinking in the future.

Thank you for your response. The reason for my question was this.....currently there are little if any deals out in my area with distress opportunity.  So I  figured that I could build a home from the ground up  and flip it. 

Of course I would be my own GC ( in order to make a profit) but I  ran the numbers and there is definitely some potential profit.

I just wanted to know if anyone else has done this?

William 

@Ben Schembri You are incorrect in your dti calculations in regards to underwriting a conventional non owner occupied loan. I've been a mortgage broker in Rocklin CA since before Biggerpockets was created.

A person would need to do 12 brrr types of transactions(loans per year) in order to see a drop in their credit score. That is impossible to do 12 brrr transations in one year so dont worry about your credit scores. The biggest challenge with getting a non owner conventional loan is that lenders give you 75% of the actual monthly rental income when calculating dti. The lenders give 75% of the rental income because they figure there will be a vacancy at some point. The underwriter will use what is on the lease to determine the monthly rental amount and the appraiser will do a rental market survey when he appraises the property. If the market rent is lower than the lease provided then the underwriter will use that amount as the monthly rental amount. A rental market survey is completed to keep the investor honest.