How to Invest in Real Estate During Inflation: Your Credit Score Matters
Let’s unpack what it means to invest in real estate during inflation.
Inflation is rising. Interest rates are rising. Lenders are looking at risk and reward, and they’re becoming much less lenient than they’ve been in the recent past.
Think of this time like 2010: investors who aren’t ready will have a hard time continuing their business. Investors who are ready can jump in and take advantage of chances to build generational wealth.
What will be the key to preparedness for this downturn in the market? Credit scores.
Let’s look at lender credit score requirements, lending options, and how to invest in real estate during inflation.
What Is the Credit Score Range?
Credit scores range from the 400s to the 800s. Lenders, though, look for 620 to 800 credit scores.
Credit Score Ranges and LTV Expectations
In recent times, 640 used to be an average minimum score for lenders. But in the last several months, that’s risen to an average of 680.
Lenders are prioritizing quality over quantity in who they lend to, dropping off 15-20% of available borrowers.
In addition to changing credit score requirements, many lenders are also changing how much they’ll lend.
We know some lenders who have raised their requirements from 640 to 680, and they’ll only loan out 65% LTV. To get 80% LTV, they used to require 690-700; now, that credit score range is 720-740.
How Interest Rates Impact Lender Credit Score Ranges
With rising interest rates, it will be harder to get cash flow on properties. If your rate goes from 3% to 6%, that’s doubled the amount of interest you pay every month.
Lenders will be concerned with cash flow. They want to make sure they lend to solid people who have a good history of making their payments.
As rates and inflation go up, you need to be prepared to take advantage of what will happen in the market as you invest in real estate.
You’ll need to know what credit score range lenders are looking for, and you’ll need to know your score.
How Do I Check My Credit Score?
A good credit score is necessary for successful real estate investing. So it’s important to answer the basic question: How do I check my credit score?
Does Checking My Credit Affect My Score?
How can you check your credit without it impacting your score? If your credit is checked in the wrong way, it can impact you by 3-5 points. Not a big deal, right?
But if your lender requires a 680 credit score, and you go down to a 679… you just got squeezed out of the loan.
There are two kinds of credit checks: hard inquiries and soft inquiries. A hard inquiry will knock your score down temporarily. Luckily, most methods of checking your credit online are soft inquiries and shouldn’t impact your score.
Where Can I Check My Score?
You can start somewhere like CreditKarma.com and sign up for a free account. Even though it’s not FICO-score-driven, it can give you an idea of where you’re at. It’s a good way to check your credit score without affecting your credit.
You can also visit AnnualCreditReport.com for a yearly free copy of your credit report. Also, some banks and credit card companies will offer a free credit checking service with your account.
Use these free, online checks that don’t bother your credit to keep a pulse on your score. Check these three months before you need a loan. That gives you time to take (or avoid) certain actions to raise or maintain your score for when you apply for the loan.
Know Your Score to Get Ahead
We’ve been spoiled in the last decade with low rates, easy money, and wide options. That’s all slowly coming to an end. Lenders will be pickier, with higher rates and fewer options.
But that means there will be fewer investors out there buying, so the opportunities are even better for you. As long as you’re credit-ready.
Loans for Real Estate Investing Amidst Inflation
Who are the lenders for real estate investing? Here are the basics of each lender and how rising inflation and interest rates will affect your relationship with them as you invest.
In real estate investing, there are three key lenders.
1) Banks and Credit Unions
National banks don’t usually have many options for real estate investors. But local banks and credit unions love real estate investors.
Even so, banks are the most conservative lenders. They’ll be especially tight with their money until they figure out the new normal with updated federal interest rates.
As a real estate investor, bank loans will be increasingly difficult to get. It’ll be more common for banks to lend 60-70% of the LTV with high credit score requirements.
In the last few months, we’ve been receiving four times as many calls as usual from investors who typically go through banks for all their money. Already, investors are getting turned away by banks.
2) Hard Money Lenders
There are two types of hard money lenders: national and local. Each type of lender will approach the change in the economy in a different way.
Much like banks, national hard money lenders will tighten up on their requirements and options. National lenders were known for offering up to 90-100% LTV. Now, they’ll only lend 80% and their credit score range requirements have gone up. The higher your credit score, the higher your leverage with national hard money lenders.
Local lenders won’t change nearly as much based on the economy. Smaller lenders make their income by loaning money, so they’ll never tighten too much. Local hard money lenders don’t typically have any credit score requirements.
Get to know the hard money lenders in your area. They’re a valuable asset to have in your portfolio of lenders, especially now, and especially if your credit score is outside of the range of traditional lenders.
3) Real OPM
OPM is Other People’s Money – from family, friends, neighbors, or other people in a position to lend. You might think that normal people wouldn’t want to loan you their money at a time like this. But you would be wrong.
People with money in the bank are making around a 1% return. So getting a 5%, secured return from you is way more appealing. OPM lenders won’t care about credit – as long as you secure their money and ensure them a return.
All three of these lending sources will be important. You’ll need a mix of all of them. Putting them together in the right way will accelerate your real estate career.
Credit Score Requirements for Fix-and-Flip Loans
During inflation, how does your credit score impact the flow of money to invest in fix-and-flip real estate?
We monitor a few national wholesale companies that have raised credit score requirements 40 points and dropped their LTVs by 10%. And it will only get tighter.
These lenders will charge higher rates too. One of these companies used to have 7% interest rates. Now, they’ve already risen to over 10%.
What does this mean for you?
You’ll need to raise your credit score to have a chance at these loans. And between lower LTVs and higher interest rates, you’ll have to expect to put more money down.
Use these tricks to raise your score while applying for new loans.
BRRRR Loans and Credit Score Requirements
During inflation and rate-rising, cash flow can take a huge hit. This means you’ll need to be much more careful with BRRRR loans.
BRRRR’s Two-loan Strategy with Rising Requirements
We’ve mentioned how traditional bank loans are changing. But even DSCR loans – loans based on rental income from property – are raising rates up to 9% and requiring credit score minimums.
You’ll have to be much more intentional with your BRRRR loans.
In BRRRR, there’s two loans, and you’ll need good credit scores for both. The first is a hard money loan (where national lenders require higher scores). The second is long-term, either a traditional bank loan or a DSCR (which are all raising requirements).
Upcoming price drops and foreclosures will be perfect opportunities for BRRRR properties. Investors who can get approved for financing will be the first to take advantage of these opportunities.
Fewer investors will be able to keep their business going. You need to know your credit score so don’t lose out on funding!
Your credit score is an important part of your business. You’ll need to be better at credit than ever before in your real estate career.
You can take advantage of this dip! Be credit-ready to invest in real estate during inflation.
Download our credit score checklist here.
Watch our videos on credit preparedness here.
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