Does Your Credit Score Matter When Buying Rental Properties?

HOW IMPORTANT IS YOUR CREDIT REPORT WHEN IT COMES TO REAL ESTATE INVESTMENT?

You need money for an investment. Banks have money to lend. Banks want to judge your creditworthiness and since Fannie Mae turned to FICO scores beginning in 1995, credit scores have been central to consumer loan underwriting. It makes all the sense in the world that banks want to evaluate risk before offering a loan, but is the math different when it comes to investment property?

Although your credit score is still a relevant measure, lenders do not give it the same weight as they would if you wanted a loan on a primary residence. The math is different because the liability is spread out. While a mortgage for your primary residence is often a calculated gamble for lenders banking on your ability to pay 360 months in a row without incident, the mortgage payments on an investment property will naturally be bolstered by incoming rents. While your credit score is still important enough to look at, it will not make or break the deal if you’re looking to borrow for investment purposes.

MORE THAN ONE PIECE OF DATA

The underwriting process will take several data points into consideration rather than just focusing on your credit score. Most notably, they’ll focus on how much income the property produces. High income potential can easily offset a lower credit score by decreasing risk for the lender. They’ll also look at your tax returns and any history you have with investment. If you have a successful track record with similar properties, it will certainly help in convincing the lender that you are a low-risk client, even if your FICO score doesn’t show it.

Are you selling your house and need to provide estoppel sheets to the buyer? The estoppel tool will enable you to convey all pertinent information on a neat and clean PDF document. When you have printed them out you can even have the tenant sign it in person. Talk about professional and efficient!

HISTORY AND A HOLISTIC LOOK

Credit scores are relatively new in the world of lending. Credit reports were available from credit bureaus for years, but they were not standardized and were subjective to the point that who, and more importantly, who didn’t, receive mortgages attracted more scrutiny. The credit score system we have now was born out of discriminatory practices such as redlining and the subsequent regulation in the 1970’s.

When it comes to investment property, lenders look at the bigger picture. While credit scores make it easier to ensure all qualified people can buy a primary residence, a different approach is needed to assess a potential customer’s creditworthiness and ability to repay the loan. For that reason, a past foreclosure, a costly divorce, or some other black mark on your credit, can be mitigated by context, investing history, and other variables that can convince banks that your past may not be relevant to your current reliability. Additionally, investors typically have an additional property that they’ll offer as collateral to further defray risk. In the end, lenders cast a wider net and can work with broader indicators, rather than simply relying on the credit score algorithms.

LEARN MORE: HOW TO ACHIEVE FINANCIAL INDEPENDENT AND RETIRE EARLY THROUGH REAL ESTATE INVESTMENT

PRIVATE MORTGAGE INSURANCE

There is one little catch worth mentioning. If you’re putting down less than 20%, you’re typically going to need to pay Private Mortgage Insurance (PMI) on that loan. In today’s market, most lenders are asking for 25-30% down, but if you’re a well-informed first home buyer who didn’t fall for the Norman Rockwell picket-fence nonsense and instead are using your First Time Buyer Opportunity on a multi-family home, you could put down as little as 3.5%.

If you are someone who gets a loan for less than 20%, you’ll have to pay PMI until you hit that threshold. That insurance exists to protect the lender and came about post 2007-2008 crash. Similar in principle, it’s also required that you have a credit score of 660 or higher to secure that loan.

LEARN MORE: WE NEED TO EDUCATE YOUNG PEOPLE ABOUT REAL ESTATE OPPORTUNITIES!!!

NEXUS’ ADVICE: BE HONEST

You’re investing and it’s critical that you get that loan, but there’s no excuse (and no reason) for embellishing or stretching the truth. Lenders know that investors with many properties carry a lot of debt and subsequently have a high utilization of credit. While this can really hamper your credit score, lenders will give you the opportunity to show that you consistently pay it off with monthly rents that come in.

You don’t need to be perfect and banks understand that none of us are. If you are 100% honest and truthful with lenders, they’ll find a way to work around past failures if they feel your investment is a profitable one. They know you’ll have money coming in and they are in the business of giving people like you money for projects just like this. Play the game the right way and don’t be overly concerned about that credit score.

LEARN MORE: SYSTEMS MATTER: WHY DO IT YOURSELF MANAGEMENT OFTEN FALLS SHORT

NEXT STEPS

It’s Nexus Property Management’s goal and responsibility to help educate property owners and prospective property owners for the sake of improving investment opportunities for all. Real estate investment is an avenue for investors of all ages and backgrounds and it’s our hope that the recent uptick in hiring professional property managers will continue. Reach out to the Nexus team closest to you.

LEARN MORE: NEXUS’ GOAL OF REBRANDING THE PROPERTY MANAGEMENT INDUSTRY

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Mick Lefort is the Vice President of Operations for Nexus Property Management®. A National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.

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