Cash Out Refi 2 Yrs After Chap 13 Bk Discharge.

ontheedge

LoanSafe Member
Oct 31, 2009
4
0
1
Oakland, CA
Hello,

I'm sorry this got so long. I like to be thorough. I tried to put the most relevant information first.

I was discharged from a 5 year Chap 13 on May 27, 2015. As soon as I hit the 2 year post-discharge mark, I want to refinance my current ARM into a 30-year fixed rate and take $100K cash out for repairs and an add on or remodel. I am pretty sure my house will appraise high enough to take the $100K out and still have an LTV at or below 80%. I want the security of a fixed rate, but I am in the early stages of planning the remodel and won't spend most of that cash for several months. I wonder whether I should just refi my current balance and get a HELOC for the repairs that I can draw down as needed. I've been getting daily rates from one broker and the cash out rate is about .25% higher than a straight refi. I assume a second mortgage will be at an even higher rate, even if it is a HELOC.

I am leaning towards doing the cash out refi in order to lock in a fixed rate on the entire balance while rates are low, but would love to hear your recommendations.

Here are my financial details and a couple more questions:

Mortgage bal after 6/1 payment: $219,600
Value per Zillow: $471K
More realistic value: $400K
SFR in Oakland, CA
Fico Mortgage Scores per a Lender 3 weeks ago: 781, 760 and 753 (Those were run before I learned that even though there is no trace of my BK on my credit reports, I still must wait 2 years from discharge for a conventional loan.)
FICO 8: 790, 841 and 825
Car payment $450 (Nov 2016 purchase, $23.6K bal)
Minimum cc payment on card carrying balance: $27 ($2500 bal, $220 actual monthly payment)
Base Salary for single earner 2 person household: $96,500.
Typical bonuses and overtime: Approx $5K per year
Other assets: $10k CD, $300k in fully vested 401K and rollover IRA, $6K paid off car.
I am likely to remain in this home until a retire in 20 years and perhaps even for the rest of my life.

I was carrying a balance of $2500 on one card that I just paid off. So, when that statement period closes in the first week of June, it is possible my credit scores will get a bit of a bump. Given my above scores, will a slight bump help my prospects at all? If for some reason that mid score dropped below 760, but stayed above 740, would that hurt?

After paying down that balance, my savings account is down to about $200. I plan to use the CD to pay closing costs and was thinking of cashing it out and transferring it to my savings account next week. Is there any reason to wait until after I have a rate locked in to do that?

If I lock in a rate for a cash out refi and my house does not appraise at what I expect, what happens? Can I just lower the cash out amount to 80% LTV without changing the rate? Is my assumption that I must stay below 80% for the best rates correct? If I end up at 75%, am I likely to get a lower rate? (I also do not what to pay PMI)

How common is it for mortgages to have prepayment penalties and for how long are the penalties typically effective? There is a possibility I won't use the entire $100K and would like to have the option of paying

Here is some history that may or may not be relevant.

I purchased my home in November 2004 for $355K with 80/20 no down financing. I refinanced the 2nd to a fixed rate before the housing market crashed. The first was a 5/1 arm with Countrywide, now with Bank of America at 3.875 (1 yr libor + 2.25 adjusting 12/1). In Dec 2009, my interest only period ended, I had a lot of credit card debt and I couldn't refi because my house was worth less than half what I paid. I filed Chap 13 in April 2010 and stripped the second lien. After that experience, I am very reluctant to get an adjustable rate and count on refinancing in the future. However, I might consider a 10/1 30 year second for the $100k.

I considered a HomeStyle renovation loan or something similar, but since I have some equity, I'd like to avoid the complications and higher rate. I am also not far enough along in my renovation planning and don't want to delay the refi until I am.

I would appreciate whatever advice anybody has for me.
 

Erik Sandstrom

Mortgage Expert - Call 1-619-379-8999
Staff member
Loan Safe Mortgage
Jan 14, 2011
2,040
160
63
San Diego, California
www.loansreduced.com
Hi Ontheedge,
These are questions your mortgage broker should guide you through as this is a very sensitive transaction that you're about to enter into. Of course we are glad to help you here and I myself am a 43 state licensed mortgage lender. If you need a 2nd opinion I would love to be that person.

When it comes to deciding which program to go for, in your specific case I would go for a renovation product - for example Fannie Mae HomeStyle. Typically the rates for that program are similar to what a conventional rate & term refinance would be rather than cash out. The only factor of not going that direction would be the timeframe of completion. If you're not looking to start the work right away it may be more beneficial to go with a cash out refinance.

When it comes to the rest of your questions, I'll address them below. If I'm missing anything please feel free to let me know:

Keep in mind I am not a credit expert but I have been doing this 11 years and have seen just about everything under the sun. The views expressed on this site are those of the individual author and do not necessarily represent the mortgage bank I am employed with.

760 vs 740 credit - you're not going to see much different if any at all with pricing between those two credit scores. 760 is usually the top tier, anything above that doesn't really matter and would not provide a benefit to the interest rate.

Credit - will paying your card off increase your score? In many cases, NO - the reason behind this is that when your card shows a 0 balance that means you're not using it and can actually damage your score. Pay the card down to 10$ remaining and make sure to use it and pay it down again the next month.

Regarding the CD being used to pay closing costs - why not just wrap them into the new loan rather than exhausting the account assets? If you're planning on pulling money from the CD, this shouldn't affect your decision of locking the loan now vs. later.

If your home doesn't appraise as high as you expect - this is a reason to do the renovation loan rather than a cash out refinance. You would be able to do all the repairs as long as they warrant a value increase. If you're close and are ok with receiving less cash out due to the appraised value coming in lower, the cash out direction will be a little less stressful than the renovation product as you can do the work yourself on the home or pick whatever contractor (even if he's not licensed or has a felony on his record). We look at contractors very carefully when doing a renovation loan, if they have felonies or issues with their license we would ask that you find a new one.

Mortgages with prepayment penalties - this is usually on hard money loans that don't conform under the new rules and regulations set forth by Dodd Frank, the CFPB, OCC and other regulatory agencies. To answer your question, no in most cases there are no pre-payment penalties or balloon payments.

I would have to say in regards to homestyle having a higher rate - I personally would have to price the loans out to see the difference but my guess would be that homestyle has a lower interest rate than a cash out refinance but I could be mistaken.

I know you're working with someone but again these are questions that should be directed to the loan officer directly that is handling your file. If you feel that you're not getting the service you deserve please don't hesitate to reach out to myself at 619-379-8999 or [email protected] - we are one of a very few that do specialize in renovation loan products.
 
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ontheedge

LoanSafe Member
Oct 31, 2009
4
0
1
Oakland, CA
Thank you for taking the time to answer my questions, Erik.
The loan officer for the one lender that I have been getting daily quotes from quotes Homestyle loans at about .4% higher than cash out refi. I will be doing some shopping around and will contact you. I also am not really ready to go forward with construction, but I guess I could be if I can find some contractors to give me estimates quickly. It seems to take a while to even get an appointment. I am nervous that rates will go up if I delay too long. But, you have me considering the Homestyle again.

LOL @ my screen name. I was on the edge of the financial cliff when I first registered here. Now I guess I'm on the edge of refinancing. :)


Hi Ontheedge,
These are questions your mortgage broker should guide you through as this is a very sensitive transaction that you're about to enter into. Of course we are glad to help you here and I myself am a 43 state licensed mortgage lender. If you need a 2nd opinion I would love to be that person.

When it comes to deciding which program to go for, in your specific case I would go for a renovation product - for example Fannie Mae HomeStyle. Typically the rates for that program are similar to what a conventional rate & term refinance would be rather than cash out. The only factor of not going that direction would be the timeframe of completion. If you're not looking to start the work right away it may be more beneficial to go with a cash out refinance.

When it comes to the rest of your questions, I'll address them below. If I'm missing anything please feel free to let me know:

Keep in mind I am not a credit expert but I have been doing this 11 years and have seen just about everything under the sun. The views expressed on this site are those of the individual author and do not necessarily represent the mortgage bank I am employed with.

760 vs 740 credit - you're not going to see much different if any at all with pricing between those two credit scores. 760 is usually the top tier, anything above that doesn't really matter and would not provide a benefit to the interest rate.

Credit - will paying your card off increase your score? In many cases, NO - the reason behind this is that when your card shows a 0 balance that means you're not using it and can actually damage your score. Pay the card down to 10$ remaining and make sure to use it and pay it down again the next month.

Regarding the CD being used to pay closing costs - why not just wrap them into the new loan rather than exhausting the account assets? If you're planning on pulling money from the CD, this shouldn't affect your decision of locking the loan now vs. later.

If your home doesn't appraise as high as you expect - this is a reason to do the renovation loan rather than a cash out refinance. You would be able to do all the repairs as long as they warrant a value increase. If you're close and are ok with receiving less cash out due to the appraised value coming in lower, the cash out direction will be a little less stressful than the renovation product as you can do the work yourself on the home or pick whatever contractor (even if he's not licensed or has a felony on his record). We look at contractors very carefully when doing a renovation loan, if they have felonies or issues with their license we would ask that you find a new one.

Mortgages with prepayment penalties - this is usually on hard money loans that don't conform under the new rules and regulations set forth by Dodd Frank, the CFPB, OCC and other regulatory agencies. To answer your question, no in most cases there are no pre-payment penalties or balloon payments.

I would have to say in regards to homestyle having a higher rate - I personally would have to price the loans out to see the difference but my guess would be that homestyle has a lower interest rate than a cash out refinance but I could be mistaken.

I know you're working with someone but again these are questions that should be directed to the loan officer directly that is handling your file. If you feel that you're not getting the service you deserve please don't hesitate to reach out to myself at 619-379-8999 or [email protected] - we are one of a very few that do specialize in renovation loan products.
 

Erik Sandstrom

Mortgage Expert - Call 1-619-379-8999
Staff member
Loan Safe Mortgage
Jan 14, 2011
2,040
160
63
San Diego, California
www.loansreduced.com
That's great, I have seen you post before in the forum. We are glad to have you as a long time member of the forum!

Feel free to let me know anytime what you would like to do or obtain a quote on. Our company actually specializes in renovation loan products, we have a division that specializes in just those products. In some cases as the renovation products are very time consuming and a lengthy loan process, having a department that does just those loans is sometimes best to have it done directly through them with me being a direct point of contact.

Looking forward to talking with you soon.