Why Credit Matters When Investing In Real Estate?

Investing in real estate is no walk in the park. It is an expensive industry to venture into. Properties are becoming less affordable by the day, but this also makes it a lucrative investment opportunity.

Anyone can invest in real estate if they are willing to do the work, open their mind to the options available, and practice patience.

While a bank loan is the most common method of financing the project, it requires an excellent credit score and a down payment.

One major factor lending institutions consider when lending a borrower is their credit score. It is a three-digit number that indicates the creditworthiness of an individual.

A high score shows you are capable and likely to pay back debt as agreed. A low score shows you are a risky borrower, and banks are likely to avoid financing your real estate project.

The credit score is derived from various factors such as:

• Bill payment history
• Unpaid balances
• Credit utilization rate
• Credit history
• Number of hard inquiries
• Type of credit

If the report indicates a problem in paying your bills on time, you are likely to delay your installments. A lot of outstanding debt suggests that your income is heavily committed. And the lender may conclude that an additional debt could cause you to default.

Your credit score will determine how fast you get approval for your credit application. A risky borrower will need to provide additional security, fill a lot of paperwork, and have guarantors, making the process long.

But with an excellent credit score, you can easily negotiate for favorable terms, and get a better rate.

A credit score does not just help banks avoid lending to a potential defaulter. It prevents you from borrowing an amount that could later become a burden.

In most cases, lenders ask for a down payment when financing a real estate project. The amount could be as high as 25% of the value of the project.

The down payment acts as a form of additional security. In case you default, the bank will have a chance to recover their full amount after disposing of the asset at market value and taking all the proceeds.

But you can still finance your real estate investment using credit and with no money down.

1) Non-bank Lending institution

Alternative lenders are non-bank financial institutions that offer fewer restrictions when lending money. They include private money lenders and hard money lenders who will provide you with the money you need for a return. They are not under any regulations. You need to carry out your due diligence and study the contract carefully before making any commitment.

2) Home Equity

If you already have a home or property with equity, you could use it to finance your next real estate project. You can apply for a home equity loan or a line of credit and use it to pay for a down payment. Alternatively, ask for a cash-out refinance and use the money for a down payment. With the money for a down payment, you can apply for a mortgage for the new property.

3) Seller Financing

Rather than getting a bank to finance your real estate project, you can get into a mortgage agreement with the seller. The seller becomes your financier. This agreement is known as seller financing. Instead of down payment, you can agree on an interest rate and repayment schedule. It should also include the consequences of default.

A poor credit score should not be the reason you give up on investing in real estate. For instance, you could sell your old property and top up with some savings to purchase the property.

Here are some other options that do not require credit.

Option to Buy

This is a situation where you acquire a property using the lease-option. In this case, you get the property without initially obtaining legal ownership. It involves signing a long-term lease agreement with the option to buy in the future at a given price. The rent you pay for the property goes to the purchase price.

Equity Partnership

There is always an investor out there looking for an opportunity to grow their money, but lack ideas or the time to put in the work required. Partner with such an investor in your real estate project. While they provide the finances, put in the work needed to make profits and share it 50/50.

Conclusion

Your credit score indicates your capability to manage debt and achieve financial growth. With a good score, lenders will be more willing to finance your real estate investment projects and provide friendlier terms.

As you work on improving your score, explore options that allow you to invest without using credit. Find a real estate partner, or lease the property with the option to buy. Other options are to get into a seller financing agreement, use your home equity, or get financing from a private lender.