What Credit Score Do I Need to Invest in Real Estate? (And What If I Don’t Have It?)
What do you need to do to invest in real estate with a low credit score?
60% of the calls we gotten in 20+ years in real estate lending involve the question:
“What credit score do I need to invest?”
And unfortunately, there are a lot of beginner investors out there who need to work on their credit. But until they increase their credit score, how can they get money to start their real estate career?
Right now is a great opportunity to start. A good credit score is crucial to take advantage of the kind of market we haven’t seen for twelve years.
The credit score you need to invest in real estate depends on who you’re getting money from. Let’s take a look at some of your funding options with different credit scores.
Do Hard Money Lenders Check Credit?
First of all, a question for many beginner investors is: “Do hard money lenders check credit?”
Yes and no.
In the hard money lending world, there’s a big split in lenders’ approach to credit scores.
National Hard Money Lenders – Credit Scores to Invest in Real Estate
On one side, there’s the national lenders, the big hedge funds, the major institutions. For them, it’s all about credit and experience.
You end up being a number to these bigger companies – a data point. So they focus on the numbers that represent your success. The most important of these numbers is your credit score.
The larger the institution, the smaller the box they need you to fit in. So if you’re looking for money and your credit is below 680, you probably won’t fit in the box of national hard money lenders.
Local Hard Money Lenders and Credit
On the other side, there’s smaller, local hard money companies. These local lenders won’t base their loans on your credit score.
Most local hard money lenders look at you and your deal. They’ll want to know:
- what you’ll do with the property
- what the house is like
- what the numbers are
to see whether you have a good chance of making money from the deal.
If you’re investing while your credit score is lower, gear yourself toward these local lenders. There are plenty of these hard money lenders around – hundreds in the Denver market alone!
What Do Hard Money Lenders Require?
Most local hard money lenders won’t credit check, but they will look at a few other things.
What do they look for? How do you know if you’re the type of person they want to lend money to?
What Hard Money Lenders Generally Require
Local hard money lenders look at a combination of information about you:
- Your experience
- Whether you’ve done flips or rental properties before
- The success of your past investments
- How many you’ve done in the past three to five years
And if you’re new to investing, lenders will want to see that you’re working with people – realtors, contractors, etc. – who do have good real estate investment experience.
Cash Requirements By Hard Money Lenders
Hard money lenders will also require some cash.
It might be 10-20% down. Or maybe your deal is so good they won’t require any money to be put into the property. Either way, most lenders will still want to see that you have a little cash accumulated.
This backup money is considered reserves. If an unexpected rehab cost comes up, your lender will want to be sure you could cover it.
Also, the lender will simply want to ensure that you can make your payments. They want to build a great relationship with their clients, which starts with choosing investors that will make the process smooth.
All small lenders want is to lend money, then get it back with interest. If you can prove you can make that process happen as simply as possible, any local lender would be happy to work with you.
Credit Score Requirements to Invest in Real Estate with Local Hard Money
Local hard money lenders might not require your credit score, but they’ll still check your credit.
Your credit report will give them an idea of your financial habits – who they’d be getting into a money relationship with. They’re mainly looking for a history of bankruptcy, foreclosure, or lack of payments.
Why don’t local hard money lenders require credit scores? Real estate investors are credit-dependent in a credit-driven industry. A lot of our clients use credit cards to cover the cost of flipping. These high card balances result in real estate investors tending to have lower credit scores.
How to Find Loans for Fix-and-Flips and BRRRRs
As an investor looking for money for a fix-and-flip, you might be getting squeezed out by rising credit score requirements. As the economy changes and lenders get tighter: Who do you reach out to? How do you get loans for fix and flips?
If your credit score is outside of the current credit score requirements for lenders, here are some tips on how to find loans for fix-and-flips.
Local Hard Money Lenders and OPM for Fix-and-Flip Loans
As we mentioned, local hard money lenders will be the most likely to get you real estate investment loans under current credit conditions.
But there’s another major way we recommend to fund your fix and flips, especially during this market: OPM.
Real, average people who want a better return on their money than they’d get with bonds or stocks will be willing to lend to you during this time. If you can show people you can secure their money, they’re likely to lend to you.
BRRRR with Low Credit Score to Invest in Real Estate
Typically, when you buy an undermarket rental, you use two loans: a hard money loan and a long-term refinance loan. If your credit score isn’t where it needs to be for banks, you’ll need to look into OPM for the longer term loan.
You could still get bank loans with a low credit score, but they’ll likely have higher down payments.
If a 720 score could get a loan that requires 20% down, a 640 score might only get you a loan if you can bring in 40%. OPM can cover that down payment cost, or any other gap in funding for a BRRRR or fix-and-flip loan.
Other Options Beyond Fix-and-Flips
With rising interest rates and lender requirements, it just might not be the right time for you to do fix-and-flips. What are some other options to focus your investment career on?
Owner carries and subject tos can be a great option in this upcoming market. These are ways to obtain properties without needing to qualify for a loan through a bank. The homeowner either lends you money to take over the property, or keeps the mortgage in their name while you make payments.
Subject tos and owner carries are important options to consider when your credit score to invest is low.
What Is Real Private Money?
We’ve mentioned it several times in this article, and now it’s time to really dig in. What is real OPM? How can you set up and use real private money?
OPM When You Don’t Have the Credit Score to Invest In Real Estate
OPM is a tried-and-true method to get money when you have a bad credit score. It’s fallen out of popularity a bit in the last few years because there had been a lot of money flooding in real estate. With money so easy to get from banks, many investors devalued the power of OPM.
We believe you should always have OPM lenders in your portfolio, but especially in a down market.
What Is Real OPM?
OPM lenders can be family, friends, or other people you may not even know personally. Real private money can come from anyone looking for a better return on a large chunk of money. As long as you take care of someone’s money, you can always find people who want a secured, asset-backed place for their cash.
Once you prove to be a competent investor, you can build strong OPM relationships. It can be as simple as calling up your lender, telling them about a deal, then getting the money exactly when you need it.
Now is a great time to start finding these people. Especially if you don’t have the right credit score to invest in real estate in more traditional ways.
Get The Credit Score You Need To Invest In Real Estate
If you got into investing recently, maybe you’re not quite sure what to do now that lenders have raised credit requirements. You can start by looking at:
- small private lenders
- alternative investment methods like subject tos and owner carries.
But your number one goal should always be to raise your credit score. Raising your credit score to invest in real estate will automatically open up options for you, even as things are tightening overall. And the faster, easier, and cheaper you can find the money, the more you can take advantage of the next market.
If you need help getting your credit where it needs to be, check out these videos.
Download this free credit checklist.
Or reach out with your credit or hard money questions at HardMoneyMike.com.