Cancelling Credit Cards to Get Cash Out Refinance. You have an excellent credit score, great credit history, plenty of equity, and yet lender wants borrower to cancel many of his credit cards to qualify for a refinance.
Q: I have a situation in my mortgage refinance process and need your advice. My lender wants me to cancel credit cards in order to qualify for a cash out refinance.
My husband and I have two houses. We live in one of them and we are trying to sell the other one but we couldn’t get the price we wanted. So, we turned the other home into a rental property. We are not underwater in either home.
We owe about $30,000 on the rental home with an appraised value of about $339,000. We owe about $225,000 on the home we’re living in and it was recently appraised at $320,000. We both have stable income and great credit scores (around 790). We’d like to refinance our loans to get a lower interest rate and take cash out of the rental property.
Cancelling credit cards helps with your potential debt-to-income ratio
During our refinancing process, the mortgage company said we have to close three of our credit cards in order for them to approve the loan. We pay off our credit cards every month and one of them has a zero balance. The other cards have balances but only because we use those cards each month. We pay them in full each month.
If we cancel those cards, it will hurt our credit score. I really don’t want to cancel credit cards and damage our credit. Why are they demanding these unreasonable conditions?
Don’t cancel credit cards – if you can help it
A: Lenders don’t always make smart decisions when it comes to loaning money to borrowers. Clearly, you have plenty of home equity, a stable income, and a very high credit score. You pay off your credit card bills each month, which means you don’t carry a balance at all. The word “balance” refers to an amount that is left unpaid each month, on which you pay an interest rate.
On paper, you look like a sure bet.
Cash out refinances make lenders nervous
The problem is that you want to do a cash-out refinance, which makes lenders very nervous these days. They don’t understand why you want to do a cash out refinance, and automatically assume it is because you are in financial trouble. I’m sure that someone else might fit that bill, but not you.
Still, you’re working with a rental property. There may be limitations on what conventional lenders are able to do when it comes to refinancing investment properties. Cancelling credit cards might make the lender feel better about how much available credit you would have access to after closing. For example, if you have three credit cards, each with a $25,000 limit, a lender would see that as a potential $75,000 credit limit. That might be high enough to avoid approving your refinance.
Find a lender that won’t make you cancel your credit cards
A better idea is to shop around with different lenders. When a lender doesn’t make it easy to get a loan, it usually means they don’t want the business – for whatever reason. Instead, try to find a company that wants to work with you. Try a credit union, local or regional banks, or even an online lender. A local mortgage broker might know of other lenders that would be interested in helping.
Whatever you do, don’t cancel your credit cards. They help keep your credit score high. That makes it easier to get a great loan at a great price. Find a different lender who will offer you better loan terms.
We wonder why a lender would suggest an action to you that would only serve to damage your credit history and score. It seems counter-intuitive that a lender would want you to borrow money from them when you have a score close to 800 only to see that score drop to around 720 or so due to you cancelling three credit cards at the same time.
You should also protect yourself. If you end up closing the credit cards, you should only do that at the closing table when you know the lender is ready to fund your deal. That way if the lender backs out of the closing, you will not have canceled your three credit cards and your credit score should remain high.
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