Will using credit cards hurt my Refi on BRRRR?

Question

I’m looking to achieve my first BRRRR this year.

In order to do so I will be buying the home with 25% down using my own cash and using private money and opening up credit cards to help with the rehab.

The credit cards are 0% interest in the first 12 months. I’ll be able to Refi before then.

Will using the credit cards hurt my refinance?

Brie Schmidt · Answer

Yes.  If you have a balance above 30% it will lower your score.  Also, the minimum payment on each card will be taken out of your DTI.  So before doing it I would run it through with your lender, how much you will put on CC, what the min payment will be, where you score is at now, and see if he thinks it will be enough impact to prevent the refi

Chris Mason · Answer

The most common thing that comes up:

• Oh look a 654 FICO score due to credit cards being in high utilization %.
• We know for a fact that once those are paid off (via this refinance) the FICO will jump up 50 points. We can exclude from DTI as indicated above, but...
• ...time travel isn't allowed and that FICO jump will not happen until after closing, so they unfortunately must get the 654 FICO interest rate or pay points to get it down to the good FICO interest rate (discount points are how someone with a low FICO can basically bribe a lending institution to 'pretend' they have a 740+ FICO for interest rate purposes).

The math you do is to compare points now to buy the rate down, to six months of higher payments plus closing costs on a refinance in six months. If they are close, I error towards buying the rate down now, since no one can guarantee where rates will be in six months AND convenience of doing it all at once... unless my winning personality is just so great that you enjoy the mortgage process so much that you want to do it twice... sometimes I feel like a dentist! I'd rather get it all knocked out in one visit than have multiple dental visits.

Some of the loans I've done with the highest closing costs, due to points, are just like the above. Points upfront, to save them a second "dental visit" and second set of closing costs and six months of higher interest. In many cases the math doesn't actually add up here,  but the borrower is a high income self employed individual, and shuffling mortgage paperwork around a second time actually represents lost income even if the mortgage math by itself adds up otherwise. Is your time worth $20/hr or $500/hr?

Account Closed · Answer

@William S.

Which is why you want business credit cards, not personal, that way it does not affect your FICO other than the initial inquiry....it is hidden borrowing !

Brie Schmidt · Answer

I think they can get an exception if the cash out funds are made out to the lien holder (CC Company)

Albert Bui · Answer

Its important to setup the cards and season them with 6-12 months of good ontime payments way ahead of any purchase where you plan to utilize the cards past 30% to avoid unnecessary fico drops prior to applying for financing.

You can also open them after you close on your property however if you open too many cards relative to the amount of tradelines you have outstanding currently it may shock your credit history and lower your scores in the short term (6-12 months) because your credit history may not have seen that many cards opened before in such a short period of time.

However, if you have 15-20 tradelines with 5+ years on time payments and no late and then you open 2-3 cards, it probably wont do much. Its all relative, credit is not so black and white, and why we mainly hear about general rules like 30% or less utilization per card. The truth is the best fico scores are obtained at 0-10% of utilization but that the affect on your credit scores is not so harsh till you exceed 30% so thats probably why people talk about 30% so much.

Depending on where your fico scores are right now you may want to plan accordingly to keep that fico high through out your rehab otherwise you endanger your rate/pricing for your exit refinance atleast with respect to conventional agency financing (fannie/freddie).

One other solution is to utilize commercial or local portfolio financing similar to what @Brie Schmidt does as portfolio financing is not sensitive about short term drops in fico  as much as conventional agency loan products.

On my own projects I keep around all options (portfolio, commercial, agency, etc) just to have plan A, B,C, D....

Best of luck,

Albert Bui · Answer

HI Geordy,

As long as your HELOC is secured (which it should be against a property/real estate) your utilization on this type of revolving account doesnt affect your fico scores similar to an unsecured revolving account (credit cards & signature lines or loans).

Your concern is no more.

However, on the very off chance  some lenders, banks, and credit unions might make a mistake and forget to attach the HELOC to the property or fail to report it to the bureaus as such. In those cases you have to call the creditor to make sure they are reporting it as secured debt otherwise it will affect your fico scores similar to any other credit card or revolving line. I've seen this a few times in the past years.

Best,

Geordy Rostad · Answer

I used it for a project recently and it did drop my score fairly drastically but I was still in the mid-700's. I didn't max it though. I was probably at 80%. When I sold the property and paid back the HELOC, it shot up to 827 right away.

Geordy Rostad · Answer

I also have this same worry. Trying to find a BRRRR or two and I'm going to use my HELOC purchase the thing in cash. I'm worried though that if I rack my HELOC up to 90% it's going to drop my FICO quite drastically. I just ran my score this morning and it came back at 839! According to the lender though, my HELOC maxed out maxes my DTI. I'm concerned that any BRRRR will put me in a funky position where I could totally afford to keep the rental but I'll be forced to sell it because of the ability to qualify for the refi.

Will using credit cards hurt my Refi on BRRRR?

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