investing with bad credit Archives

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
OPM
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.

Happy Investing.

Real estate investing with bad credit is tough. Here’s how you can raise your score.

Loans fuel your real estate investment business. The easier, faster, and cheaper you can get money, the more successful you’ll be. How can you guarantee you’ll get money from lenders easily, fast, and cheap? Having a great credit score is the best place to start.

But if your credit score isn’t what it should be, how can you succeed?

Why is Your Credit Bad?

First of all, why is your credit bad? Knowing the answer to this question is the key to your investing success.

Who Won’t Succeed in Investing with Bad Credit

Habitual bad credit is a problem. If you’re the type of person who:

Doesn’t pay bills because you “don’t want to”
Refuses to believe that improving your credit score is important
Can’t or won’t keep track of personal finances

…then real estate investment probably isn’t for you.

The money side of investing is huge. If you’re unable to pay attention to the numbers, pay your debts, and prepare your money, you won’t succeed in real estate. And if you aren’t willing to improve your bad credit, it will be nearly impossible to get money to buy properties to begin with.

Who Can Succeed Investing with Bad Credit

However, many people have the potential for a great credit score. But maybe your credit was impacted by a major life event:

A divorce
Medical bills
Lack of credit education

Any number of life events can turn a responsible, willing individual’s credit bad – including never being taught the importance of credit.

Whatever your situation is, now is the time to focus on your credit score. You can come back from any dip in credit if you’re willing to put in the time and effort.

And if you want to invest in real estate, credit is vital. Your credit will either propel you to success, or drag your career down. Let’s get it fixed.

How to Raise Your Credit Score

Improving your credit score is relatively simple – anyone can do it, if they’re willing. All it takes is getting educated, then spending 30 to 90 minutes per week.

It could take you up to six months to bump up your score in the long-term. But if you don’t start now, it’ll keep getting harder to raise it. The best time to start fixing your credit is now.

Lenders look at credit to see how you paid people in the past as a clue to how you’ll pay them in the future.

If your credit is just “dinged up,” there are three quick solutions to improve it.

1. Get Your Credit Balances Down

We often see investors and contractors put all renovation costs of a job on their credit cards – especially for BRRRR projects. They use more and more of their credit, which drags their score lower and lower.

This is a tempting yet dangerous pattern as a BRRRR investor. You put your money into the property from your credit card, which you expect to get back with your refinance. But if your credit score is too low, the refinance might not go as planned. With bad credit, you won’t be able to get the refinancing loan as easily or for as much money as you expected. This will make it harder to pay off the card balances you built up during the rehab.

A tip to get around this problem is to go private. If you can get a private loan that won’t show up on your credit, you can use that money to pay down your balances.

A better score will give you better rates for your long-term, credit-based financing. A lower credit score could make your loan rate a point or two higher, which could snowball into you paying an extra $50,000 to $70,000 over the life of the loan.

2. Get Authorized

Another quick fix for a low credit score is using someone else’s good credit to help your bad credit. Find a family member or friend who has good, long established credit, and ask them to add you as an authorized user. Their good credit will show up on your report and boost your score.

3. Pay Your Bills on Time

If you can’t keep up with your bills, that may be a sign to get rid of some of your credit cards. Some of our clients have over 20 credit cards open! Consolidate your accounts as much as possible.

But when you stop using an account, don’t close it. As long as it has a good history, an open, unused credit account will continually add a little boost to your credit.

Turn Bad Credit to Good Today

To get into investing with bad credit, the best step is to focus on raising your score.

It can be overwhelming, but just dive in. Ask for help – from trusted family, friends, or Hard Money Mike.

Or, if you have major credit issues dragging you down for the long-term, you may need to reach out for advice from a professional. Spending a couple hundred dollars now will pay for itself later in your great real estate investments made with a high credit score.

To start working on your credit score today, download this free credit score checklist.

Watch our videos on credit here.

Let’s fix your credit score fast! Happy Investing.

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What Credit Score Do I Need to Invest in Real Estate? (And What If I Don’t Have It?)