Credit score and real estate investing two things that go hand in hand. What is one of the most important factors when buying a rental property or any other real estate investment? Good credit of course.
You hear a lot of investors and business owners talk about credit and how important it is. They say stuff like ” you need credit if you want to make it in this business” or ” you need credit to buy real estate”
This isn’t very helpful at all. Before I bought my first rental property I had a lot of question that I didn’t have answers to. Here is a list of questions that we will be discussing. These questions are about real estate ( buying a rental property)
- How is a credit score determined?
- Why is credit so important when wanting to buy rental properties?
- What credit score do I need to buy real estate?
- Can I buy real estate with bad credit?
- I want to invest in real estate! What can I do if I have bad credit?
How Is A Credit Score Determined?
There are five major factors that determine the score. They are in order of importance:
1. Payment History = 35%
2. Outstanding Balances = 30%
3. Length of Credit History = 15%
4. Types of Accounts = 10%
5. Credit Inquiries = 10 %
1. Payment History: This is the biggest factor in determining a credit score. This is also the factor that most people slack on and have bad credit because of it. The more payments you make on time the more points you get. Payments have to be one time. You lose points every time you miss a payment or the payment is late. It’s that simple.
If you file for bankruptcy or have any judgments against you, your credit score will suffer a lot. You will lose a lot of points.
Tip : If you can challenge and remove the negative items off your credit report, you will be able to regain the points lost.
2. Outstanding Balances: The magical 30% rule. Keeping your credit balances below 30% will help improve your score. The older your revolving accounts are the better. Payment history on those account must be great, no late payments. The 30% rule states that if you have a credit card with $1,000 available credit, you should keep the balance below 30% which is $300 in this case. This shows that you can manage your available credit.
If you keep the balance of the credit card above 30% your credit score will be negatively affected.
Tip: Instead of 30% challenge your self and stay below 20% or even better 10%.
3. Length of Credit History: The age of your credit history plays a big role in determining your credit score. Simply put it, the older your credit history the better it is for your credit ( Credit history must be good, no late payments or bankruptcies ).
For example, if you have a credit card that is in good standing and its over 15 or 20 years old it will help your score a LOT more than a credit card that is a couple of months old.
Tip: If you have past due payments or you’re in collections, make sure to start paying ASAP, make a plan and pay as much as you can.
4. Types of Credit Accounts: Having a diversified account portfolio is a plus. For example having a credit card and a personal bank loan or a small college loan all in good standing with a nice long history is a lot better than one credit card.
Im not saying go out and get a college loan or a personal loan. If you don’t need it don’t get it.
Also you can lose points for high rick loans. Make sure to only use what you need and not what you think you need.
5. Credit Inquiries: This one is very simple, avoid useless credit inquiries. Stay away from places that run your credit. If you go to a pay-day loan please they will run your credit multiple time to get you qualified for a loan. Avoid the unnecessary credit inquiries.
Tip: Try to keep credit inquiries to 2 or less a year for best results.
The 3 credit reporting agencies Experian, Equifax and TransUnion use these numbers and data to determine your credit score. Having good credit will save you thousands over time. Your life as a real estate investor will be made a lot easier with a great credit score.
Why Is Credit So Important When Wanting To Buy Rental Properties?
Like I said before a credit score and real estate investing go hand in hand. Buying a rental property is a risk an investor takes to create monthly passive income. The real estate investor is not the only one who is taking a risk. The bank that lends you money to buy your rental property is also taking a huge risk. That is why it is important to have a good credit score 720 or more.
The lender looks at your credit score to determine your risk level, they want to make sure you will be able to pay the loan back. Someone with a credit score of 575 is a lot more risky to the lender than someone with a credit score of 725.
What Credit Score Do I Need To Buy Real Estate?
When buying a rental property you will most likely use a conventional loan. A credit score of 620 or more is required, expect the interest rates to me much higher. To get a good rate you need to have a score of 720 or better. A credit score of 760 is will get you the best rate the lender can provide.
A score of 760 may take some time to get and a lot of hard work.
A credit score of 720 should be your goal when looking to buy a rental property. A lot of real estate investors will suggest you to have a score of 720 or more.
Can I Buy Real Estate With Bad Credit?
The answer to this question is yes. There are many ways to invest in real estate when your credit is not that great. Here are some ways to invest in real estate with bad credit.
- Seller Financing
- Hard Money Lenders
- Privet Money Lenders
Most of these alternative ways will require you to have a lot of cash saved up, they also have large fees and the interest rate is a LOT higher than what you would get from a bank mortgage.
If you don’t have a house at all, you may want to look into FHA mortgages, they normally are easier to get with a low credit score. Maybe you can find a property or a duplex that you can live in and rent out the rest.
I Want To Invest In Real Estate! What Can I Do If I Have Bad Credit?
First thing that you should do is pull your credit report. There are three major U.S. credit bureaus, Experian, Equifax and TransUnion and each one uses a different method to determine a score. After you get your reports look over everything and see what needs to be improved.
You can check out our Tutorials page for a step by step guide to improve your credit. This is a free guide that will do wonders for your credit score if applied.
Credit Score and Real Estate Investing Final Thought
As you can see credit is very important when buying a rental property. A good credit score will save you a lot of money now and in the long run. Good credit takes a long time to build, start to build it now. Improve your credit score by making payments on time, keeping balances below 30% and not running pointless inquiries.