Bad credit score? Simply a number. It doesn’t define you. Don’t allow your credit score to stop you from investing in real estate. Don’t wait to get your credit score better.
Too often, we hear the argument “I’d love to buy an investment property but my credit is so B-A-D.” Take the first step: take a deep breath and know you are not alone.
Nearly one in three Americans has bad credit. And don’t worry if you’re one of these people. More significantly, when it comes to investing in real estate you are not dead in your tracks.
Anyone who’s ever purchased a house knows how critical credit scores are. If your credit score is low – plain and easy – it’s almost impossible to get a conventional home loan.
Some lenders do not find a bidder with a score below 620. You may need scores above 700, 720 or even 740 to apply for a mortgage, depending on the lender.
But What About Real Estate Investors?
The good news is: When it comes to investment in real estate, there is much more versatility. When your credit score is off the charts, is it easier to get a traditional loan? Totally.
But even if your ranking is on the low side you still have a host of other real estate investment options.
If you’re serious about investing in real estate, the first thing you need to know is that there are unlimited ways to finance any contract.
And don’t worry. Let’s go through a few options below, to get you started.
#1. GET A HARD MONEY LOAN
Having a loan from a lender of hard money is a perfect choice for property owners with less than stellar credit. Notwithstanding its name, it’s not hard to get the “hard” money — it’s everywhere.
Hard money lenders are private individuals or groups that offer short-term, real estate-backed loans. Such lenders are involved only in investment deals — they aren’t supporting someone who wants to buy a house to stay in.
The best part is that hard money loans can very quickly — often within days — get you funds.
Therefore so many investors in real estate use this source. They are fast, painless, and turn around easily.
Credit scores are not considered by hard money lenders as the “be all, end all.” They can determine who they are lending to and what those loans look like. If you have decent credit score, cool!
But if not, you’re still more than welcome to apply. Most of the time, lenders of hard money just care about one thing: if the deal is a good deal.
Their key preoccupation is the home value. If the numbers work, they’ll finance the offer more than likely, whether or not you walk in with a credit score of 780.
The property is to be used as collateral by a hard money lender. They take possession of the land, if you don’t pay them back. That is why the numbers are important to them.
If you bottom out, they’re still going to make money.
So, if you have a decent deal with strong benefit potential on your hands, it is likely to be financed by a hard money lender — even though your credit score is just m-e-h.
Cons of Poor Credit
A low credit score does not prohibit you from being approved for loans but interest rates are higher than conventional bank loans. The majority of interest rates vary from 10 to 15 percent, depending on the lender. Borrowers with hard money do have to pay “points,” which is a portion of the loan. Points can range from 2 to 4 percent of the total amount of the loan.
So, in return for convenience, you’re going to pay higher rates, but that’s all right considering the potential benefit you’re going to walk away with.
Another impediment is that they may not cover the entire cost of buying the property. Currently these lenders lend 65 percent -75 percent of the property’s current value. Others will lend, after it has been repaired, based on the value of the land, also known as the “after repair value” (ARV).
That leaves you to finance the difference, or find another funding source to fill the gap.
How To Find Hard Cash Lenders
Do a fast Google search in your area for hard money lenders, and see what’s coming up. Also, go to meetings and network with the local real estate investors association. Ask the members in there for suggestions.
If you have found a lender with hard money, don’t forget to make sure the lender is reputable. We suggest that you do so by seeking references from the lender, and then following up on them.
You will also see if any allegations against your future lender have been lodged with the Better Business Bureau.
At least one person affiliated with the hard money lender must have their Real Estate Broker license.
You will confirm that their license is valid and check to see whether any lawsuits were lodged against it or not.
#2. LOOK FOR PRIVATE MONEY LENDERS
Another source of financing to consider is that of private lenders of capital.
Private cash will come from someone wanting a return on their investment. From a structured lender to a friend, parent, business associate or acquaintance – this can be anyone.
Even if your credit score isn’t perfect, lenders of private capital will still lend to you, with favorable conditions. For a private money lender the quality and interest of your contract is much more important than your credit score.
A certain collection of laws do not apply to private money lenders. And terms of repayment, tax and all the rest are up for negotiation.
And since it’s the cash of the person themselves, they determine whether to run your credit or not.
If you can demonstrate that your offer has merit, and you can close quickly — and quickly make a profit — private money lenders will overlook dings on your credit report.
#3. GET A PARTNER
Many people are interested in investing in real estate and will gladly use their credit to finance transactions, given they don’t have to tackle the other heavy lifting (your job).
So why not strike a relationship with such a person? Someone who has A+ credit? You will be able to lock in more cash support for your offers in return.
It is a win/win.
An acquaintance, parent, friend, colleague, neighbor or someone you met at a local networking event or Facebook community may be your future partner!
Just know, you want to work with someone who’s missing the expertise you have, but has the money you need.
You lack the credit in this situation, so partner with someone who has outstanding credit and can secure the financing for your deals. And maybe you have something they don’t have.
The easiest way to reduce credit card debt and start repairing your credit history for long-term financial success is something you may consider.
What, then, would you carry to the table? Maybe it’s your time, your expertise in deal making, or some other tool. You should work out a 50/50 agreement and you’ll share the profit when the deal closes.
If you want to follow this path, you may want to formalize your agreement by selecting a corporate arrangement and registering your company.
This will cover your personal assets should you run into issues down the road in your partnership. To develop your company, consult with a business lawyer.
#4. MAKE THE SELLER THE BANK (SELLER FINANCING)
Seller financing is a best-utilized method for fully owned and paid-out properties. When a seller doesn’t need “quick cash” from their home sale and cash flow isn’t the issue, then this approach could be a great choice.
When a deal is funded by the seller – they are essentially the bank. In other terms, you have a mortgage with the seller, basically.
In such deals, the lender requires you to make recurring payments until the property is paid off, or the loan term expires.
Seller Financing Benefits
- Little to no qualifications
- Negotiable terms
- Credit isn’t a factor
- Flexibility to meet the needs
- Very low closing costs
Seller financing deals can be a win-win for everyone. The seller sets the terms, and others won’t ask for too deep a look at your credit score or dig into your finances.
The seller, meanwhile, gets a stream of monthly profits.
A retiree, for example, would love the idea of having a fixed monthly payment for their home. Similarly, a landlord may want to unload a property without getting completely out of the business.
A seller financing arrangement should satisfy all sides in both cases, helping you develop capital and credit along the way.
How can you locate a real estate owner wanting to do that? You have several options:
- Vacant properties – Homes that are empty offer a great opportunity. Drive around and look at your neighborhood. Then, if you see something. contact the owners to see if this form of arrangement will benefit them.
- Absentee landlords – An absentee landlord is someone who owns but doesn’t reside in an investment property. After the prospects have been established, contact them to see if they are interested in your proposal.
- Real Estate Industry Networkings – Attend real estate meetings in your city, and industry meetings. Activities like this are perfect networking places and meeting people who may be trying to get rid of an investment property.
#5. CONSIDER WHOLESALING
Wholesaling represents a common first step for new investors in real estate. This strategy needs nothing to be supported, and your credit score also makes little difference.
How Does Real Estate Wholesaling Work?
- You find a distributor who wants to sell their home. You then negotiate with the seller about the price and conditions and put together an agreement to buy the home.
- You find another buyer to take your spot, instead of buying the house yourself. It could be another investor trying to repair the home or a landlord needing a rental.
- The buyer is going to follow all the terms you outlined in your purchasing agreement and is going to close the deal.
- They take control of the house, the seller gets the amount that you all agree to and you get an “assignment” fee to facilitate the sale.
Many property investors start wholesaling only to build capital. A good deal on wholesale could drive up $5,000, $10,000, $20,000 or more.
Some of those deals might help you rebuild your credit and in the process generate serious capital.
You Can Do It!
One of the great things about investing in real estate is that it’s available to everyone. You don’t have to get into the bank and conjure millions or a decent credit score.
You have to have zeal, perseverance and desire. If you can bundle that, your performance is without a ceiling.
Get innovative, interact and concentrate on seeking financing without good credit to close deals.