Making the decision to start investing in real estate may be one of the best financial moves you have ever made. You don’t want issues with qualifying for financing to stop you in your tracks.
A key factor that determines what kind of financing first-time real estate investors get is credit score: that three-digit number that gives lenders all they need to know about whether or not you’re good at paying your debts. Before you visit any of your local banks to discuss financing investment properties, you need to take a look at your credit score and credit report.
Related: Tips on Rental Property Financing for Beginner Investors
What Is a Good Credit Score and How Does It Affect Your Loan?
A credit score falls in the range of 300 to 850, and it represents your credit report (which shows the history of your borrowing). The higher your credit score is, the better your mortgage will be for financing investment properties. Basically, lenders want to know how much of a risk they’re taking when they are giving you a loan for financing investment properties. If your credit score is low, you’re a bigger risk, and they will want more compensation to make up for the risk they’re taking. This means higher interest rates and shorter payment periods.
While different loans need different credit scores, and lenders vary on what they look for in a credit score, we can talk about the minimum credit score you should have as well as the best one for getting a bank loan. Generally, lenders at your local banks will be looking for a credit score of at least 620. However, to get lower interest rates and longer payment periods, you should have at least 660.
If you’re aiming for the ideal credit score to guarantee you get the best rates and payment plan for financing investment properties, your score should be 740 and over. This is if you can pay a 20% down payment. If you have to put down less, your lender will require private mortgage insurance. If this is the case, the perfect credit score will be 760 and higher.
Related: Want to Know How to Buy Rental Property with No Money Down?
So, what happens if you take a look at your credit score, and it’s far too low to get a good mortgage, or even to be considered for one? Read ahead to see the ways in which you can improve your credit score for financing investment properties. Any improvement you apply will take some time to affect your credit score, so you should begin studying the matter and acting a few months before you apply for a mortgage.
How to Improve Your Credit Score
If you’re buying your first investment property, it’s possible you’ve never really done a thorough review of your credit report. For real estate investors, reviewing the credit report regularly is very important. It will let you identify any habits that are poorly affecting your credit score and make changes to improve it.
Study Your Credit Report
The first thing you can do to improve your credit score when you’re going about financing investment properties is to review your credit report as far back as it goes. The first thing you’re looking for is any errors that are in the report. Maybe there is a payment marked as late or unpaid that you definitely paid on time. Sometimes, accounts that aren’t even yours show up on your credit report and add negative data.
Another thing to look for is if there is any negative information that cannot be proven. If a creditor puts something on your credit report, he/she has to be able to verify it upon your request. Any companies that no longer exist or have been bought are a good place to start because their records will have most likely been lost. There’s always a good chance that records on any really old debt have also been lost and can’t be proven.
You can also attempt to remove any small collections or unpaid bills if they are verging on the seven-year mark. Once certain debts sit on your credit report for seven years, they are removed anyway. So, you might be able to convince a creditor to remove them. While these may seem small and insignificant, they do ultimately affect you when you are financing investment properties.
Finally, make sure that all negative information is complete on the report before looking into financing investment properties. For example, if you didn’t pay because a certain service was never provided in the first place, this needs to show up on the credit report. Any circumstances that apply to the payments that don’t show up can be enough of a cause to have the entire piece of information removed from your credit report.
Disputing or reporting any of these things on your credit report can be done by contacting the credit bureau. This can be done by filling out a form online or sending a formal letter in the mail.
Pay Your Bills
Paying your bills on time or even earlier than the due date is a good way to improve your credit score. Even if you have a few late bills on your credit report, you can still salvage the damage by paying on time a few months before financing investment properties. Set some kind of reminder on your phone calendar or from the websites of the companies you owe so that you can stay on top of payments.
If there are any old unpaid bills, pay them if you have the cash, and ask your creditor to delete them from your report. He/she might be willing to settle the account. Any unpaid bills that are less than thirty days old should also be paid because then they won’t show up in your credit history at all. Creditors usually don’t report late bills until after thirty days.
Work on Your Credit Utilization Ratio
The credit utilization ratio has a big impact on your credit score. This is the ratio of how much credit you have used over the amount of credit that is available to you. The lower this ratio, the better.
The first step in improving this number and having a better chance in financing investment properties is to pay off your credit card debt if you have the cash. From there, you want to keep all of your credit use below 30% of the credit available. If you can go as low as 10%, that would be even better.
You can also try applying for a new card/account. This will raise the credit limit, improving your utilization ratio. However, you should only apply for ONE, not multiple new cards. If you apply for multiple new cards in a short period of time, it’ll look like risky behavior to lenders and affect your credit score negatively.
Try raising the limits on your current credit cards. While you may get rejected if you have significant accumulated debt, raising the limit will improve the overall credit utilization rate.
Become an Authorized User
Do you have a reliable family member or friend who pays all his/her bills and debt on time? If so, request to become an authorized user of his/her account. The credit history for that account will show up as part of your credit report and improve your overall credit score. Just be confident in the fact that this person has a good credit history to share and is reliable to keep it that way while you apply for a bank loan.
A low credit score can bring you down when you’re thinking of applying for a bank loan for financing investment properties. However, it’s not the end of the road. After looking at different rental property prices, using sites like Mashvisor, you’ll see just how much financing you need and why you’ll need a good credit score. While it can take time to bring it up to a credit score lenders will love, it is very doable. Consider visiting an experienced lender to help you improve your credit score and get the best loan for financing your rental property.
Related: How to Buy Rental Property with Little or No Money
