What Credit Score Do You Need for an Investment Property?

August 24, 2020

The Ultimate Guide to Your Credit Score in Canada Laptop Image

Real estate is one of the main streams of income for many of the wealthiest in the world. To understand the importance of credit scores when seeking a mortgage, we first need to understand what the phrase “credit score” actually means.

What are Credit Scores?

A person’s credit score is any three-digit number ranging between 300 and 850, determining how trustworthy a borrower is. Credit scores are calculated by the FICO method.

The criterion for assigning this score revolves around the number of bank accounts a person has, the frequency with which they borrow as well as their ability to return short-term and long –term loans.

  • Bad Credit: 300 – 600
  • Poor Credit: 600 – 649
  • Fair Credit: 650 – 699
  • Good Credit: 700 – 749
  • Excellent Credit: 750 – 850

A score near 350 is poor, while a credit score of around 700 makes you a great potential candidate for both loans and insurance.

Related article: What is a good credit score in Canada?

Are Credit Scores Important?

Borrowers with a low credit score are more likely to default on their loans and are often avoided by reliable creditors, falling prey to loan sharks.  These loan sharks offer mortgages and loans at increasingly steep interest rates, which borrowers often find unable to return.

In the same vein, a high credit score reflects well on the borrower and means that they are prime candidates for loans. These borrowers can often receive a mortgage from any bank they desire and receive lower interest rates and easier payback timelines than their less-endowed counterparts.

How are Credit Scores and Real Estate Investments Connected?

Credit scores come into play, especially when a potential real estate investor visits a bank to take out a mortgage.  Real estate is a steep investment, even for well-established banks, so it is likely that they disqualify candidates with poor credit scores.

The goal for any real estate investor requesting a mortgage is to get as much money for an as little interest rate as possible. The aim of the creditor, usually a bank, is to charge the highest interest rate they can.

A quality credit score gives a borrower the confidence to negotiate for better mortgage repayment conditions.  He or she can visit different banks to optimize options and compare all potential contracts to select the one that suits them the most. A higher credit score can also help you meet the down payment requirements of the property you are interested in buying.

A borrower is an excellent mortgage candidate if their credit score is somewhere around 755.

A poor credit score automatically portrays you as an untrustworthy recipient of a loan, and most banks see a failed investment when they look at you.

Can Somebody with a Bad Credit Score Receive A Mortgage?

Yes. The good news is that an aspiring real estate investor who has a poor credit score can still receive a mortgage. While most issuers of mortgages are banks and reputable mortgage providing firms, borrowers can also request a loan from an asset-lender.

Asset-lenders run their own financial stability checks. These lenders measure the potential by the properties the borrower owns, often sidelining the employment status and monthly income of the candidate in question. However, they still take a good look at the credit score. Again, a low credit score means high-interest rates and massive down payment percentages, often skyrocketing to 25%.

Asset-lenders do not have a standardized criterion for judgment, and each offer may vary. A pro-tip while seeking an asset-lender mortgage is to search for a lender who has reasonable offers for the credit score range you lie within.

In any case, do yourself a favor and never opt for a subprime mortgage no matter how ideal it looks at first glance.

How Can I Get the Best Possible Mortgage?

You probably already know the answer to this one; boost your credit scores. If you cannot find a mortgage that aligns with your financial goals due to poor credit scores, think of it as a sign from the universe not to seek out a loan.

Real estate investment is often long-term, and a mortgage is bound to you for a good portion of your life. Venture out and try your luck, but only when you are sure it is the right thing for you.

Some things you can do to increase your credit score are:

  • Paying your bills (utility, phone, and internet) on time.
  • Paying back loans as soon as possible.
  • Keeping credit card balances as low as you can.

Hopefully, you will be able to increase your credit score and become the real investor you have always aimed to be in no time.

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