INVESTOR GUIDE · BEFORE YOU REFINANCE
Mistakes to avoid before a DSCR refinance
Tanking your credit on the flip and planning to fix it with the refinance, or paying all cash without knowing a lender will let you pull it back out.
The short answer
- The most common mistake is credit card utilization during the rehab.
- Investors plan to pay the cards off with the DSCR loan, but the score is already down when they apply.
- A DSCR loan is a 30-year loan. Locking it in on damaged credit means a higher cost of funds for years.
THE MISTAKE
Destroying your credit before you come in
The pattern is the same every time. The investor runs the rehab on credit cards, thinking they’ll just pay them off with the DSCR loan. The problem: by the time they apply, their credit has already tanked from utilization, even with perfect payment history.
WHY IT COSTS SO MUCH
You don’t want a 30-year loan built on bad credit
A DSCR loan is a 30-year mortgage. Your rate and leverage are set by your score at application, in credit buckets from 620 up. You need 720+ to reach an 80% cash-out, and the best pricing starts at 760. Take a 30-year loan on poor credit and you’ve set yourself down the path of a higher cost of funds for the life of the loan.
HOW TO AVOID IT
Four ways to keep your credit clean
- Use a HELOC. A HELOC balance doesn’t hit your score the way credit card utilization does.
- Get the points, then pay it off before the balance reports to your credit.
- Use a business card that doesn’t report to your personal credit.
- Use a spouse’s or partner’s credit for supplies and rehab costs, so yours stays clean for the refinance.
More on this in the credit trap.
ANOTHER COMMON MISTAKE
Paying all cash: just because you can doesn’t mean you should
Cash wins deals. You close faster and negotiate a better price. The mistake is leaving that cash in the property. Every dollar sitting in a paid-off rental is a dollar that isn’t working on your next deal, and that’s lost velocity of capital.
Run the litmus test before you pay cash: will a lender refinance this property and let you pull your cash back out? Investors come to us all the time with properties no bank will touch. Then they’re stuck. They can trade their cash for cash flow and leave it tied up, or they can sell. But if you can’t get financing, your buyer won’t be able to either. Either way, you’re looking for a cash buyer, or relying on one, to get your money back.
If the property passes the test, you don’t have to wait. With delayed financing, some of our preferred lenders can use the appraised value as soon as one day after purchase, no rehab required. Buy with cash, close fast, pull it back out, and go again.
STRAIGHT ANSWERS
Refinance and credit questions
Can I pay off my credit cards with my DSCR cash-out?
You can, but your rate and leverage are set by your score when you apply. Pay-down after the fact doesn’t change the loan you already locked.
What credit score do I need for an 80% cash-out refinance?
720+. The best DSCR pricing starts at 760.
When should I start protecting my credit?
Before the rehab starts. Plan how you’ll pay for the work so utilization doesn’t pile up on your personal cards.
KEEP READING
DSCR KINGS · INVESTOR FINANCING
Planning a refinance? Talk to us before the rehab
We’ll map the refinance and the credit plan before you spend the first dollar.
Business-purpose loans for investment properties only; not for owner-occupied homes. Lending guidelines, leverage and loan programs vary by lender and by state and are subject to change. Terms and approval depend on the property, the borrower’s credit and capital-partner guidelines and are not guaranteed. Examples are for illustration only.
