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The Details:
Live in Madison, WI, going 5.5 years into a 20 year land contract. Rate is 4%. No penalty for early payment. Original Loan was for $174,000. Current Principal Balance is $145,000. Value for 2017 property taxes is $190,000.

We are looking to refinance our Land Contract with a conventional Refi/Mortage for $165,000. We have iffy credit. Looking to use new Refi/Mortage to rebuild credit, consolidate our debt and basement remodel.

What are my options? Any alternatives to the traditional route (i.e. Portfolio Loan)?
asked Jan 25, 2018 in Refinancing by NotDan

2 Answers

+1 vote
Hello NotDan, and thank you for writing. Right now, it looks as though your loan-to-value is 76 percent using the assessor's valuation. First, in many places the assessor's numbers are on the conservative side. I'd look at other online valuation tools and / or consult a real estate agent about your property value. You may be pleasantly surprised to see that your home is indeed worth more.

Your odds of loan approval depend on what you mean by "iffy." That can mean a couple of late payments or a credit history that looks like a rap sheet, and I can't tell you much more without knowing. Are there recent bankruptcies, judgments, foreclosures, repossessions, etc.? Or did you bounce a check to your pizza guy? Makes a difference.

So going on the assumption that your credit is "fair," meaning somewhere between 580 and 640, I'll give you some options.

1. FHA allows cash-out refinancing to 85 percent of the appraised value with at least a 580 credit score. If your place appraises for $200,000, that's a $170,000 loan, allowing you about $25k for debt relief and home improvements.

2. Fannie Mae allows cash-out refinancing to 80 percent, but with "iffy" credit, approval is unlikely.

3. Your current rate is 4%, which is pretty good. I would hesitate to replace that unless I qualified for a loan with a lower rate --
 perhaps you can get a 15-year fixed mortgage in the three percent range without raising your payment much, since you've been paying on your loan for nearly six years.

4. You may be able to rebuild your credit score by consolidating debt with a home equity loan or even a personal loan, leaving your land contract alone. Both of those would likely raise your credit score, because your revolving debt utilization ratio would drop.

Pay that and your mortgage on time for six months and see what happens. However, 85 percent of debt consolidations fail because consumers lack to discipline to stop spending. See a non-profit credit counselor before taking on any sort of debt consolidation and put yourself in a position to succeed.

5. Finally, if you qualify for a rate-and-term refinance (no cash out) with a 30-year term, that should reduce your monthly payment, allowing you to devote more money toward paying off your other debts. I would do that and see how my credit looks in 6-12 months. Then, and only then, would I go for the basement remodel. With better credit and fewer debts, you'd be in a much better position to get approved, and to get a better mortgage rate.

Other option, if your income, debts and credit score are not too awful, is to refinance the first mortgage to a 30-year loan and add a home equity loan to take care of the remodel. Cash-out refinancing only makes sense when the amount of the mortgage to be paid off is small and the amount of cash needed is large. And you have decent credit, or the fees involved will eat up a lot of the cash you wanted to take out.

Note that this is my opinion, but I have worked with hundreds of borrowers in your situation, and seen what worked and what did not. Hope this helps and best of luck to you. If you want to add any information that might help me make a more targeted recommendation, please write back and I will do so.
answered Jan 26, 2018 by GinaPogol (47,650 points)
0 votes
Minimum credit scores for Conventional Loans is 620. However, rates are higher for cash out refinance. There are pricing hits on lower credit scores, LTV, and cash out refinance on conventional loan. Try to boost credit scores up by getting 3 secured credit cards with at least $500 limit. Need to provide 12 months of canceled checks and/or bank statements showing timely payments on your housing payments. Hope this helps.

Gustan Cho NMLS 873293
The Gustan Cho Team at USA MORTGAGE
answered Feb 6, 2018 by GustanCho (106,540 points)

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