Excellent credit score, great credit history, plenty of equity, and yet lender wants borrower to cancel many of his credit cards to refinance. What gives?
Q: I have a situation in my mortgage refinance process and need your advice. 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.
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.
During our refinancing process, the mortgage company came up with the condition that 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 had and continues to have a zero balance. The other cards have balances but only because we use those cards but we pay them in full each month.
If we close those cards, it will hurt our credit score and I really don’t want to close those cards and damage our credit. Why are they demanding these unreasonable conditions?
A: You are a great example of why lenders aren’t always making smart decisions when it comes to loaning money to borrowers. Clearly, you have plenty of 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.
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, it’s a rental property and there are limitations on what lenders are able to do when it comes to refinancing investment properties these days. Having you close a credit account might make the lender feel better about what you could borrow 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 draw and not want to refinance the mortgage.
A better idea is to shop around with different lenders. In our experience, when a lender doesn’t make it easy or palatable to get a loan, it usually means they don’t want the business – for whatever reason. Instead, you should 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.
The bottom line is that you shouldn’t close your credit cards because they are helping keep your credit score high – and you shouldn’t have to. Shop around for 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 closing 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.