Real Estate Investors: Know Your Credit!

The No. 1 asset for real estate investors is good credit. Without it, it’s more difficult to make deals go through, although it is possible.

Beginning investors often don’t even know what their credit rating is. They don’t understand the importance of it and therefore they don’t understand what types of loan programs and financing they can use.

But now, more people than ever seem to have not-so-good credit. There really is no shame in that. People who try to set up their own business sometimes end up in over their heads financially. We all do from time to time. Think Donald Trump, for example. So don’t feel embarrassed or think that you have to justify your situation.

Yes, credit problems and bankruptcy will be red flags to some lenders, and they will put you in a very high interest rate category for any loans you may qualify for. That’s just what you get stuck with if your credit is not so good. But you still can get help; it‘ll just take a bit more effort and determination on your part.

What that means, of course, is that you have to be persistent. Don’t give up and think that just because one, five, or even a dozen lenders turn down your loan application that they all will.

So, one of the cardinal rules of real estate investing is, “Know your credit.” By that I mean there are specific things you must know about your credit report before you attempt any real estate deals.

First, you'll want to get a copy of your credit report. The most comprehensive is a “3 in 1” report from all three of the major credit reporting agencies: Trans-Union, Equifax and Experian. Finding their websites is a simple matter of Googling them.

The main thing you want to look for on your report is whether it has any adverse information. "Adverse information" includes late payments, collections, judgments and so forth. If you have this type of information on your credit report and have the money to pay off any bad debts, do it right away.

If you don’t have the means to pay off those debts, you may want to call up the collection agencies you owe the money to and ask if you can be set up on some kind of small repayment plan. Even if you can put only $10 a month toward a debt, that shows you are trying to erase the debt. More important, when the credit bureaus get their updated information each month, it may boost your score. It’s really that simple.

You also need to know your credit score number, or FICO score. Your credit score is basically a risk-scoring system that banks and lending institutions use to see how good or bad of a credit risk you are. Be sure to specify that you want your credit score included when obtaining a copy of your credit report, because sometimes it’s not automatically provided.

The following table will help you understand where your credit ranks:

Credit Score / Rating:

700 or over – Excellent (A+ credit)

Usually signifies no significant (60 days or more) late payments on any credit payments in the prior 3 years. People with A+ credit typically receive better rates on certain loan types.

699-660 – Very Good, and 659-620 – Good (A credit)

Usually signifies no significant (60 days or more) late payments on a mortgage loan in prior 2 years and only isolated minor “lates” on credit payments in the prior 2 years. People with A credit typically can receive "market" rates on all loan types. Bankruptcies must be cleared and discharged for 4 years to qualify you as having "good" credit.

619-590 – Fair (B credit)

Usually signifies some significant (60 days or more) late payments on a mortgage loan in prior 2 years and widespread minor lates on credit payments in prior 3 years. People with B credit typically will receive slightly higher rates on all loan types, except government loans (FHA and VA), which will not rely solely on credit scoring. Bankruptcies must be cleared and discharged for 2 years to qualify you as having "fair" credit.

589-480 – Bad (C credit)

Usually signifies many significant (60 days or more) late payments on a mortgage loan in prior 2 years and widespread major (60-90 DAYS) lates on credit payments in prior 3 years. People with C credit typically will receive higher rates and higher required equity or down payment on all loan types except government loans. Bankruptcies must be discharged at the time of loan application to qualify you as having "poor" credit. Current charge offs, bad debts and judgments sometimes need not be paid off to get a mortgage. The penalty is a reduced pool of lenders, high rates, and stiff prepayment penalties if you refinance within 3 years.

A word about credit scoring. Basically, credit scoring is a statistical method of assessing the credit risk of a loan applicant. The score is a number that rates the likelihood that an individual will pay back a loan. The score looks at past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries.

Credit scoring will place borrowers in one of three general categories:

** First, a borrower with a score at 680 and above may be considered an A+ loan. The loan will involve basic underwriting, probably through a "computerized automated underwriting" system and be completed within minutes. Borrowers falling in this category may have a good chance to obtain a lower rate of interest and close their loan within a couple of days.

** Second, a score below 680 but above 620 may indicate lenders will take a closer look at the file in determining potential risks. Borrowers falling in this category may find the process and underwriting time no different from in the past. Supplemental credit documentation and letters of explanation may be required by lenders before an underwriting decision is made. Loans within this FICO scoring range may allow borrowers to obtain "A" pricing, but loan closing may still take several days or weeks.

** Third, borrowers with a score below 620 may find themselves locked out of the best loan rates and terms offered by lenders. Mortgage professionals may divert these borrowers to alternate funding sources other than FNMA and FHLMC. Borrowers may find the loan terms and conditions less attractive than the "A" loans, and it may take some time before a suitable funding source is located.

I can't begin tell you how important it is to learn how to read your credit report before buying your first real estate investment property. Knowing your credit score is 100 percent essential. You really won’t be able to move forward with building your real estate investing business until you have that score.

But please don’t throw in the towel if you find that your score is worse than you thought. It can always change, and when you start closing deals and paying those lenders back, it will start to increase.

Be patient and persistent!