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Refinance Cash-out/Debt Consolidation
Scenario: Borrower wants to do a Cash-out refinance. Property worth is $350K and she owes $157K.
Rocket Said that they can do a Refi Debt Consolidation in August.
Issue: Mortgage late: 08/2022
Recent Lates: 06/23 (2 tradelines)
Open Tradelines: 3 (car, and 2 CC)
FICO: 459
Thank you
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2 Replies
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Hey, Felix. There is no way anyone is going to touch this. The borrower needs to get their mid-score over 500 to even have a chance of making this happen. Once 12 months have passed on the mortgage late, the borrower will technically qualify for an FHA C.O. refi. LTV looks good, DTI would be the next hurdle. What are the recent lates specifically? I would suggest you get the borrower working on the mid-score now so you are ready to submit by the end of August 2023. A rapid re-score is your only hope to boost that score. If the borrower’s DTI is low, you might be able to have them open credit-building CCs with Cap One & Discover. They would need to be very disciplined and proactive with those credit-building new lines of credit. Usually, a 459 tells you they are not and will not be disciplined.
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Scenario Analysis: Cash-Out Refinance for Borrower Scenario Borrower Profile Property Value: $350,000 Current Mortgage Balance: $157,000
Equity Available: $350,000 – $157,000 = $193,000 Recent Late Payments:
- Mortgage late: 08/2022
- Additional lates: 06/2023 (2 tradelines).
Open Tradelines: 3 (1 car loan, 2 credit cards) FICO Score: 459 Cash-Out Refinance Limitations For the performance bond holder.
Equity and Cash-Out Potential: The borrower has significant equity ($193,000) available, which is important for a cash-out refinance. Most lenders, however, limit cash-out refinancing to 80% of the home’s value.
The maximum cash-out capacity is 80% of $350,000 = $280,000. This means the homeowner borrowing the amount will be able to access cash worth $123,000 after paying the mortgage.
Impact of Recent Late Payments: Incorporating late payments from August 2022 and June 2023 will be seen as red flags during the process of getting the loan underwritten. The borrower has a poor FICO Score of 459, which would make him fall into the poor credit range. Prime refinancing options are tough for such borrowers.
Challenges applicable to the case Lender Policies: Rocket Mortgage: If they have mentioned a potential for a refinance debt consolidation in August, then it’s important to understand the context. For instance, some lenders have programs that place recently late borrowers within a low credit score zone.
Waiting Period: In general, however, lenders tend to require a waiting period following late payments before a refinance is entertained, particularly for cash-out options.
Debt Consolidation Option:
Suppose Rocket is offering a debt consolidation option. In that case, they may consolidate their current debts, such as credit cards and car mortgages, with the new mortgage. This would make payments easier; however, it might not be a good idea since it may increase payments or terms.
Improving Credit Score:
Before moving to the next level, the borrower may get the credit score up by following a course such as paying off some of the existing debts, especially revolving credits like credit cards.
There is a significant amount of equity in the property the borrower owns; notwithstanding, recent late payments and poor scores pose serious difficulties in attaining a cash-out refinance. It is important to discuss Rocket Mortgage’s requirements within the scope. Credit profile enhancement measures can also be taken before refinancing. It might also be useful to consult with a financial advisor or credit counselor for a more holistic outcome.