Real estate investing is exciting and it’s very fast paced. Even the most experienced, most prepared investor can get knocked off track at any given time on any given day.
That’s not meant to scare you off or make you think twice about your decision — in fact, entirely the opposite. Because the very best real estate investors — the ones poised for the most meaningful long-term success — are the ones who can pick themselves up, dust themselves off and hop back on the path, no matter how banged up they are. And I’m confident that includes YOU.
Most of those bumps of the road are out of your control. Sometimes you don’t even see them approaching, then SLAM! You’re face-to-face with some challenge you hadn’t expected.
But some challenges are in your control. Some you can plan for while others you can, at the very least, keep in your line of vision as you navigate your path to long-term financial freedom and success.
For starters? Your credit score.
Why Your Credit Score Matters — Even As An Investor
In the real estate industry, your credit score is like your fingerprint. It’s unique to you and offers up a ton of information about who you are and what you’ve been up to. It’s also a good jumping off point for a host of next steps — other financial rocks to kick over and areas for concern as well as reasons to give a big, fat YES to your loan application. It’s also the first thing banks, mortgage brokers and lenders will look at before going too far down the path on your loan request. While they may be willing to talk shop with you — a “prequalification,” really — they likely won’t give you too much information until they’ve pulled your credit report.
Because credit reports are such key pieces of the mortgage process, most homebuyers are prepared to have a lender or lenders poking around in their financial underwear drawer and, often, they plan ahead. But when you shift to real estate investing, it can be a different ball game. Most investors, whether they’re first timers or total pros, plan to rely on alternative funding sources and not the traditional mortgage route. So they don’t anticipate the same level of scrutiny over their credit reports.
And it makes sense — but, at the same time, it really doesn’t.
Many real estate investors gloss over the importance of their credit score and history. The assumption? Hard money and private money lenders — often an investor’s go-to source for funding — look more at the deal than the investor’s credit and financials. And it’s true — in most cases. But that doesn’t mean a lender won’t ask to run your credit before making a decision, especially if you’re a first-timer or if they’re on the fence for one reason or another. A solid score and strong, lengthy history is another vote for “approve,” whereas a floundering score and credit history littered with late payments, charge-offs and bankruptcies will likely give them something to think about — and not in a good way.
In that vein, there are several loan products for investors that do weigh credit scores and histories very heavily. Bridge loans, for example — loans that help you bridge the gap when you’re transferring properties, let’s say, or working on a double close — tend to offer those with stronger credit scores the best terms and rates. Because these are super short term loans, interest can be staggering. Even saving a percentage point or two can make a huge difference.
If you’re planning to buy and hold, your credit score will likely play an even bigger role. Many investors opt for jumbo loans or, down the road, plan to refinance. Just like a homebuyer funding their primary residence, you’re going to have to jump through the same credit hoops. For jumbos, lenders will be looking for a 720+ in virtually every instance. Some even aim as high as 740 or 760 for borrowers. Refi loans also have stringent credit terms — often tougher than standard lending requirements.
What To Do — Whether You’ve Got Good Credit or Not…
That’s not to say you can’t invest in real estate if your score is lacking. It just means you need to be smart and creative.
Whether you’ve got stellar credit, so-so credit, disastrous credit or something in between, it’s important you start in the same place: by checking your credit. Knowledge is power when it comes to your credit score, and knowing where you stand at this moment in time will help you make informed decisions about how, where and when to secure the financing you need to get your deals done.
Once you’ve pulled your report, check everything. Look for inaccuracies — everything from cards you never opened to loans you’ve repaid but that aren’t reflected in your report. A simple mistake or two could be dragging your score down in a big way.
If your score is good — ideally, above 720-740 — then keep doing what you’re doing. If you’re planning to take out a loan in the next few weeks, I don’t recommend opening any new credit cards or other revolving lines of credit right now. Hang tight and wait until the ink dries on your next deal to change your credit makeup.
If your score isn’t good, don’t panic. If you aren’t planning to buy right now, then you’ve got time to start building back your credit. My advice? Start by paying down any credit cards near their limits. Any cards that have balances over 30% are dragging down your score in a big way. A maxed out card can take you down as much as 25-45 points. The more credit you can free up the better. Beyond that, be sure you’re always making on-time payments. I’ve seen one late payment knock an investor’s score down 110 points — on par with a full-on debt settlement. Yikes!
That doesn’t mean you have to be perfect, though. There are loan products on the market that will consider scores as low as 580. That said, the average FHA borrower has a score around 686, while the typical conventional loan recipient clocks in at 754. Chances are you won’t go the FHA or conventional mortgage route for your flips, but these are good benchmarks as you’re assessing your own score.
One final reason to boost your score? Business credit cards. Just like consumer cards, the best terms, most sought-after rewards and highest limits are reserved for people with the strongest credit scores. So don’t let anyone tell you credit scores don’t matter in this business. They do. But, at the same time, you’ve got alternatives if you aren’t the highest scorer. The key, though, is knowing where you stand and what to do to maintain or improve your scores.
Loans are a central piece of the Nick Vertucci Real Estate Academy training and, even, something I delve into in a big way at my workshops and seminars. Funding your deals is an essential piece of being a real estate investor and, often, it’s the piece that holds folks back the most. During our deep dive we’ll talk credit scores, including what does require a solid score, what methods are more forgiving and how to give your history a quick boost, if need be. So stop by and bring your credit reports — knowing where you are right now is half the battle.
See you there.