5 Ways to Increase Credit Score for Real Estate Investors
As a real estate investor, learning how to increase credit score can be an incredibly important asset when it comes to obtaining financing for a property. A good credit score will give you the best mortgage payment size and interest rates.
Unfortunately, investors can get bad credit scores for a variety of reasons, such as identity theft, medical bills, or unemployment. However, the good news is that a good credit score is never a requirement to invest in real estate.
In this article we’ll discuss different ways that real estate investors can increase credit score over the long term and short term. Plus, new investors will learn how to get funding even with a bad credit score.
Quick fixes
Make sure your credit card report details are accurate
When starting out, you’ll want to make sure that the information that credit bureaus are using is actually accurate.
To do this, order a credit card report from each of the 3 major credit bureaus: Experian, Equifax, and Transunion. Credit card reports can have mistakes on them and that can negatively impact your overall credit scores. Start checking details such as your personal information, payment history, and existing credit card accounts.
Become an authorized user
A person with a quality credit history can add their family member with lower credit score to their existing accounts. So, if you know a family member willing to add you as a user to their credit card, it could quickly boost your score by a few points.
Be careful with this method as any late payments from the owner’s account can reflect back on your score.
Raise your credit card limit
Try to request your issuer for to raise your credit limit. This will lower your credit utilization rate (the ratio between how much you owe and your credit card limit), and increase your credit score.
Don’t try this method if you have missed payments, are in a downward-trending score, or planning to spend all of the newly-acquired credit.
We explain this in more later in this post.
Time is your ally
Although the quick fixes mentioned above are effective and can increase credit score by as much as 100 points. The most important aspects of building a good credit is keeping your credit card utilization rate low and your payment history healthy. Therefore, a lot of time and patient is required from you.
Credit Card Utilization Rate
Your credit utilization rate is calculated by dividing your total credit card balances by your total available credit.
A low (usually in the 30% range) credit card utilization rate shows the bank that you have the ability to manage credit well. To increase your credit score, start paying off your debt and you’ll see your credit scores increase over time.
Payment history
A payment history is an indication of how well you can make payments in the future. This is why late payment history can stay in your account for as much as 7 years.
If you already have late payment, the best thing is to start fixing it right now. Start making payment on time by setting up due dates alerts and automatic payments. In addition, make sure that your paycheck schedule goes well with your payment due dates.
How to invest in real estate with a bad credit score
As mentioned above, a good credit score is not a requirement for investing. Know that if you find a great deal, you’ll be able to find a way to get it done, regardless of credit!
Below, we’ve outlined some methods that can help you get the deal done even if you have bad credit. With these methods, it’s important to do your research and decide which one is best for your specific situation.
Hard-Money
Hard-money loans are high interest rate, short-terms loans that are based on the value of the property that you’re planning to buy. Hard money loans are determined by the loan to value (LTV) ratio. This ratio is calculated by dividing the ratio of loan amount with the value of the property.
In most cases, hard money lenders will lend upwards of 65 – 75 percent of the current value of the property. With hard-money, getting approval is much easier compared to traditional lending methods. Hard-money lenders are only concerned with the value of the property and not your credit score. With that being said, hard-money is expensive and therefore your investing plan needs to be solid in order to produce profits.
Private Money
Similar to hard money, private money are secured from private groups or individuals that set their own criteria, including dictating the terms, fees, rates and guidelines. One of the advantages of private money is that it’s usually take as little as 7 days to 20 days, compared to an average of 90 days wait time from the bank.
FHA Loans
Federal Housing Administration (FHA) loan is another way to borrow money with a low credit score. Regulated by the government, FHA loan requires a minimum 600 credit score and 3.5 percent down payment. This is a viable option especially when it allows investors to bring in a co-borrower and even request the sellers help with the closing costs. Additionally, you can also use FHA loan to buy distressed properties, which is excellent for house flipping.
The downside of FHA loan is that there’s a limit of how much you can borrow. The FHA determines its loan limit by the area in which the house is located. Also, investors have to be careful with the monthly upfront insurance premium, which can make FHA loans more expensive than conventional loans.
So, do all investors need to increase credit score?
Whether you are an investor with bad or good credit, there is always a way for you to start investing in real estate. The most important aspect is understanding the pros and cons of each methods of obtaining funds so that you can maximize your profit.
Regardless, increasing credit card score is still critical. This will not only benefit your real estate investing career, but also other financial aspects of your life such as car loans, rental approval, and insurance rates.
