7 Things You Need to Know About Credit Scores and Real Estate Investing
When you’re purchasing a home as an investment, your credit score is going to play a huge role in the home buying process, so it’s worth devoting some time to. In this article, we’ll break down everything you absolutely need to know about your credit score so you’ll have an easier time getting started on your investing journey.
What Is a Good Credit Score?
People often talk about needing a good credit score in order to get a mortgage, but what exactly does “good” mean?
Credit scores can range from 300 to 900, and the higher the credit score, the better your credit rating. Most lenders consider scores from 660 to 689 to be in the “fair” range, and this is the minimum score that you’ll need to get a mortgage. Scores from 690 to 740 are “good”, and scores from 741 to 900 are “excellent”.
What Makes Up a Credit Score?
There are a few factors that can determine your credit score. The two that matter the most are on-time payments and a low rate of credit usage. Essentially, you need to make your payments on time. If payments are late, your score will go down and these late payments are noted in your report for five to seven years. Seeing that note might make lenders wary of lending you money. And the low rate of credit usage means that you shouldn’t max out your credit cards. If your limit is $3,000, and you have $2,500 in credit card bills, that will lower your score. On the other hand, if you have $10,000 available and only $1,000 on credit, that will improve your score.
The other things that determine your score are having a “mix” of installment credit (like a student loan or car payment) and revolving credit (like a credit card), the length of your credit history, and the number of new accounts you have.
How Can You Check Your Credit Score?
To get a copy of your credit report, you could order directly from one of the credit bureaus: Equifax or TransUnion. Your report should be free, but if you want to see your score, you’ll need to pay a small fee.
How Can You Improve Your Credit Score?
If your score is low, don’t worry. There’s a lot you can do to get that score up. The first thing you want to do is check the credit report for mistakes. Fixing any errors in the report can have a significant positive impact on your score.
Sometimes, a score is low due to a lack of credit. If you don’t have any credit cards or loans, lenders have no way of knowing whether or not you’re going to make on-time payments and use your credit responsibly. To fix this problem, you need to get a credit card or two and start using the credit.
However, if your score is low from mistakes you’ve made in the past, it can take a bit longer to improve the score. The most important thing to do is to make on-time payments. Even if you can only make the minimum payment, you need to make sure it gets done on time. Next, you want to focus on paying down the balance. Decreasing your credit usage also has a positive effect on scores.
Why Do Credit Scores Matter?
If your credit score is too low, you won’t qualify for a mortgage at all, so that’s one reason to make sure that you have a good score.
Also, those with rates in the “excellent” range are going to be the ones that qualify for the best rates. Remember, the lower your interest rate, the lower your monthly mortgage rate. And since you charge rental rates based on the rental market – not your own mortgage – you can make bigger profits if you have a score that will qualify you for the best rates.
Personal Credit Score vs. Business Credit Score
Note that businesses also have their own credit scores. If you’re just starting out as a real estate investor, the bank is likely to make its decision based on your personal credit score. Once you establish a company for your investments, though, you may be able to use the company’s score. This can be especially helpful if you plan to own multiple investment properties.
Good Credit May Not Be Enough
Good credit is going to get you your first mortgage. It may even get you a second and third mortgage for your next few properties. The more properties you take on, the riskier you seem to lenders, and you’ll need to put down at least a 20% down payment on any rental properties you don’t personally live in. Ask if you’re not sure how your decisions can affect your borrowing abilities.
Credit scores are an important part of the equation when you’re investing in real estate. Take the time to make sure that your score is in good shape.