Mortgages & Creative Financing

Does Your Credit Score Matter When You Invest in Real Estate?

Expertise: Landlording & Rental Properties, Real Estate Investing Basics, Personal Finance, Real Estate News & Commentary, Business Management, Real Estate Deal Analysis & Advice, Real Estate Marketing, Mortgages & Creative Financing
102 Articles Written

Rental property is typically the first type of real estate that a new investor looks at when trying to build wealth and diversify a portfolio. But many get discouraged when they realize their credit score doesn’t exactly qualify as “excellent.”

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If your credit score is low, does that mean you can’t invest in real estate?

Your Credit Score and Real Estate Investing

Your credit score is a number on a scale. A low number tells potential lenders that you’re a risky borrower, and a high number assures them you’re responsible.

According to Credit.com, there are five credit tiers:

  • Bad credit: below 600
  • Poor credit: 600-649
  • Fair credit: 650-699
  • Good credit: 700-749
  • Excellent credit: 750+

If you try to finance a rental property through a traditional lending avenue such as a bank or credit union, your credit score is one of the primary factors they will look at. Unfortunately, this usually means people who have a low score are denied the loans they desire.

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If you have bad or poor credit, loan denial is pretty likely. Even if you have fair credit, you'll probably get offered a high interest rate. What you need is good or excellent credit to obtain a rate that's competitive.

If your score isn't quite where you'd like it to be, and you have some time before you plan on applying for a loan, you can do some things in the meantime to boost your score.

Related: 8 Important Credit Report Dos And Don’ts When Qualifying for a Home Loan

First, you can prove you're responsible by making all your current loan payments on time. If you have bad terms—say, on a vehicle loan—it may be tactically worthwhile to go ahead and refinance in order to get more favorable terms that will make it easier for you to stay on track.

Other smart decisions include paying down balances ahead of schedule and quickly, making debt payments twice a month, and increasing your credit limit (and not spending any more).

Alternatives to Traditional Lending

Fortunately, your ability to invest in rental property doesn’t rest solely on your credit score and traditional lending processes. It helps to have banks and credit unions available to you, of course, but there are other options.

Take a look at a few of them:

  • Hard money lenders. Hard money lenders are simply individuals or groups that are willing to finance real estate deals on their own. They put up the cash, and you commit to make payments to them just as you would with any normal loan. The attractive thing about hard money lenders is that they're more willing to accept unconventional deals and/or work with people who have a bad credit score (so long as you can prove you're financially responsible in other areas of your life).
  • Online real estate lending. Over the past few years, a new practice has developed on the web. Somewhat like a crowd-funded investment, online real estate lending platforms enable private investors to pool their resources to fund a deal.

Related: How I Went From $0 Net Worth to Qualifying for $1M in Real Estate Financing in 2.5 Years
You have to be more careful when you choose to work with hard money lenders or online investments, but it’s good to know that other options exist for individuals who hope to invest in rental properties but have a credit score that holds them back. It’s likely that even more alternative lending opportunities will emerge in the coming years.

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Always Get a Second Opinion

When it comes to something as significant as financing a piece of real property, you should get as many inputs as possible. One person might tell you to go in one direction, another could suggest taking the completely opposite tack.

The more experts you consult, the clearer the picture should become. Never proceed until you feel largely comfortable with the route you’re going to take. Not everyone is likely to agree with you, but you’re more apt to feel comfortable about your decision.

What methods have you used to fund your real estate deals (or what are you considering)?

Leave your comments below!

Larry is an independent, full-time writer and consultant. His writing covers a broad range of topics including business, investment and technology. His contributions include Entrepreneur Media, TechCrunch, and Inc.com. When he is not writing, Larry assists both entrepreneurs and mid-market businesses in optimizing strategies for growth, cost cutting, and operational optimization. As an avid real estate investor, Larry cut his teeth in the early 2000s buying land and small single family properties. He has since acquired and flipped over 30 parcels and small homes across the United States. While Larry’s real estate investing experience is a side passion, he will affirm his experience and know-how in real estate investing is derived more from his failures than his successes.

    The German
    Replied about 11 years ago
    I believe that the best real estate sales happen in the country side. It is a win-win situation and that is a market that can never slow down. In an area like rural Germany or France, the vistas are so beautiful that people can’t resist it. And the price is also pretty realistic. Nice article and all the 4 points make sense. Thanks 🙂
    Crystal Tost
    Replied over 9 years ago
    I find the advertising in other countries and in mediums that are not real estate related a waster of money and time. I think targeted advertising coupled with good pricing and proper presentation will get the house sold to a local buyer that is likely out there as we speak. Why focus on an audience that you are not even sure exists in mediums that are not targeted?
    David Grbich
    Replied almost 9 years ago
    Setting a realistic list price at 10% below market may lead to a very lonely existence as a realtor – not many sellers in the California market have the equity to price 10% below market – but yes that should get the home sold. Great point overall – thanks.
    Daniel Roca lender from Houston, Texas
    Replied over 2 years ago
    Great article! Low credit scores are always a limitation but never a dead end road for investors.
    Brett McAuliff from Wichita, Kansas
    Replied over 2 years ago
    What about investors who have poor credit simply because of a lack of credit history (I.e. Debt free)? Does this change the game at all? What if we have cash reserves to show?
    Yanis P. from Steger, IL
    Replied over 2 years ago
    go to myfico.com and read how to improve your score.
    Yanis P. from Steger, IL
    Replied over 2 years ago
    “Other smart decisions include paying down balances ahead of schedule and quickly, making debt payments twice a month, and increasing your credit limit (and not spending any more).” I don’t think it’s a smart idea to make payments twice a month!!!!!
    Susan Maneck investor from Jackson, Mississippi
    Replied 7 months ago
    Here is a way for young people to improve their credit score. Find a relative who has good credit to make you an additional user on a credit card. They don’t need to (and probably shouldn’t) give you the card, but you will inherit their credit history on that card.
    Mario L Jackson
    Replied 7 months ago
    I need alot of help cant find funding nor can get a hard money loan this is very hard im frustrated please help
    Al Bigonia investor from Farmington, New Hampshire
    Replied 7 months ago
    Sorry Larry, but I’m not sure good credit does anything for you in Real Estate. I bought a property last November, and the Bank showed me that my Credit Score came back at 830. When I pointed out that mine was almost as good as they come, and asked them if all the hype about a high Credit Score was true, their answer was that it might matter when I apply for a Car Loan.