{"id":151331,"date":"2023-04-23T12:07:40","date_gmt":"2023-04-23T18:07:40","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=151331"},"modified":"2024-02-27T09:23:50","modified_gmt":"2024-02-27T16:23:50","slug":"credit-score-and-hard-money-loans","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/credit-score-and-hard-money-loans","title":{"rendered":"FICO Scores And Hard Money Loans: Why They Go Hand In Hand"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC8783165689\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p><em>This article is presented by Kiavi. Read our&nbsp;<a href=\"https:\/\/www.biggerpockets.com\/editorial-guidelines\" target=\"_blank\" rel=\"noreferrer noopener\">editorial guidelines<\/a>&nbsp;for more information.<\/em><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">When growing a real estate investing business, having a good FICO Score is a key factor in obtaining capital and achieving the highest return on investment. Hard money or private money lenders use this score to determine if they should give a loan to the borrower and what interest rate they should set. In most cases, hard money lenders look at your FICO Score before pre-qualifying your application and approving your loan.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">So, let&#8217;s take a look at FICO Scores, how it&#8217;s determined, and some steps you can take to improve your score over time.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Why is Your Credit Score So Important?<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">The FICO score is a very influential measure. It&#8217;s a range of just three numbers that can have major implications on your life. Those with higher scores tend to receive higher approval ratings and access to more favorable interest rates on loans.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Before getting started, real estate investors typically have one question loaded: how important is your credit score in real estate? The importance of a quality credit score should never be undervalued, especially for real estate investors. Great credit equates to better deals and money-saving tactics\u2014which, in return, provides multiple options to finance real estate and navigate the mortgage lending process. The secret is understanding how a credit score is compiled and what factors affect it.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Having a good credit score can help save you money over time, as higher scores can lead to better loan interest rates and higher leverage. Generally, those with a FICO Score of 660 or above will likely be accepted for hard money real estate investment financing, while those with a score of 720 or higher may be eligible for the lender&#8217;s best rates.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">With an exceptional credit score, you can enjoy:&nbsp;<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">A better chance for loan approval<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Easier pre-qualification for financing<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Lower interest rates<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Getting approved for higher credit limits<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Bragging rights<\/span><\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Credit Score Categories<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">A FICO credit score is a number between 300 and 850 which is used to measure a borrower&#8217;s creditworthiness and their level of risk to a lender. This range into five categories: Poor, Fair, Good, Very Good, and Exceptional.&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.experian.com\/blogs\/ask-experian\/infographic-what-are-the-different-scoring-ranges\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">67% of Americans<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;fall into the Good or higher range.<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Poor (less than 580). A score in this category is well below average, and these borrowers are considered to be risky.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Fair (580 to 669). This range is considered Fair on the FICO scale. Some lenders may approve these borrowers, though they likely won&#8217;t offer them good terms.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Good (670 to 739). FICO Scores in this category are at or above the national average. Most lenders are willing to finance these borrowers.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Very Good (740 to 799). A Very Good FICO Score is above average and shows lenders that the borrower is low risk and likely to remain in good standing.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Exceptional (800 to 850). These borrowers will most likely get approved and access the most competitive rates and other loan terms.<\/span><\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">What Affects Your Credit Score?<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Having a knowledge of what a great FICO Score looks like, let&#8217;s now evaluate the aspects that influence your credit score. Taking measures to enhance your score is only possible once you know what goes into it. Generally, your&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.myfico.com\/credit-education\/whats-in-your-credit-score\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">FICO Score<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;is affected by five main elements, each with its own effect, considering both positive and negative details in your credit report.<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong><span data-preserver-spaces=\"true\">Payment History (35%):<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;Payment history is what most impacts your credit score. Payment history comprises several factors like the number of late payments and public records like lawsuits and bankruptcies.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Amounts Owed (30%):<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;A reflection of all the money the individual owes, showing the total of all outstanding balances.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Length of Credit History (15%):<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;The amount of time you have had credit can impact your credit score\u2014the longer your credit history, the better your score is likely to be. Creating a good credit history can be difficult, particularly for people just starting out.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Credit Mix (10%):<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;Having various credit account types on your credit report could help you improve your credit score. This could be done by obtaining different types of credit, such as credit cards (revolving credit) and installment loans. Making payments on time for any new accounts you open can also help you build a good credit history.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">New Credit (10%):<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;This factor refers to the age of your new credit. If your credit history shows several new accounts and hard inquiries, your credit score could drop, and lenders may consider you a less desirable borrower.<\/span><\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">What Role Do FICO Scores Play in Getting Hard Money Loans?<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">A hard money loan is an ideal financing choice to make the most of a new investment property purchase. However, your credit rating must be decent to get such a loan. This is because the lender needs to safeguard their investment.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For borrowers wanting to get a hard money loan, their FICO Score is an important factor that can either positively or negatively influence the approval of the loan. It is a way for the lender to assess the risk associated with the loan and ensure they will get the money back they are loaning out.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Some private money lenders like&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.kiavi.com\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Kiavi<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;will do a soft credit pull to look at your FICO Score as part of its pre-qualification process. Unlike hard inquiries, soft inquiries won&#8217;t affect your credit score. On the other hand, some will make a hard inquiry to take a deeper look at your creditworthiness. You should ask your lender about their process before applying for a hard money loan.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The relevance of FICO scores to obtaining hard money loans is two-fold. On the one hand, a higher score suggests that a borrower is reliable and less likely to miss payments, therefore saving both parties money. On the other hand, having a low or nonexistent FICO score may make it challenging to be approved for any type of loan. Fortunately, there are steps you can take to raise your score.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Ways You Can Improve Your Credit Score<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">With the knowledge of what influences your FICO credit score, the following five steps can help the rating increase in a positive way. These steps target each of the primary components mentioned previously.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Check your credit reports<\/span><\/h3>\n\n\n\n<p><a class=\"editor-rtfLink\" href=\"https:\/\/www.ftc.gov\/news-events\/news\/press-releases\/2013\/02\/ftc-study-five-percent-consumers-had-errors-their-credit-reports-could-result-less-favorable-terms\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Studies have found<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;that a quarter of people have found errors on their credit reports that can negatively impact their credit scores. This is why it is extremely important to review your credit report to ensure that everything is accurate and up to date. Doing this can help you identify any issues and make the necessary improvements.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Every year, you have the right to obtain a free credit report from each of the three main consumer reporting agencies (Equifax, Experian, and TransUnion). You can also get a copy of your report from&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"http:\/\/annualcreditreport.com\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">AnnualCreditReport.com<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">It is important to carefully review your report&#8217;s details to ensure accuracy. If there are mistakes, you can dispute them by getting in touch with the relevant bureau(s) and having them corrected. This could help to improve your credit score quickly.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Improve your payment history<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Your payment history influences your credit score the most, so you should focus on improving this first. Missing or being late on payments can have a long-term negative effect lasting for seven years, so if you have a past of making late payments, it is crucial to alter this behavior immediately.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Ensuring payments are made on time is simple\u2014set up automatic payments to your revolving credit accounts. This can be done through your bank or the creditor, but be sure to have enough funds in the account each month to cover the bills. If not, you could be charged for insufficient money and late payments.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">It&#8217;s preferable to pay off your full balance each month. However, if this isn&#8217;t possible, making the minimum payments on time each month will ensure that your accounts are in good condition.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Manage your credit utilization<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">An important part of determining your credit score is the ratio between the amount of debt you have and the total amount of credit you can access. This is known as your debt-to-credit ratio or credit utilization and should be managed carefully.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">A low credit utilization rate benefits lenders, demonstrating that you are reliable and not over-borrowing.&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.myfico.com\/credit-education\/blog\/credit-score-fun-facts\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">FICO&#8217;s analysis<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;of people with a score of 785+ found that they had an average utilization rate of 7%. This indicates that the less credit you use, your score could be higher.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">A 7% utilization rate is a good target to aim for when working on increasing your credit score. A potential way to improve your credit score is to request a higher credit limit from your creditors. Although this could help you reduce your debt-to-credit ratio, it could be risky if you are an impulsive shopper. To make this strategy successful, be accountable for your spending and be aware not to overspend.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Be aware that closing multiple accounts can negatively impact your credit score\u2014this includes reducing your credit utilization and shortening the average age of your accounts. Additionally, it is important to keep in mind that when you close an account, it reduces your overall credit availability. Be cautious when canceling accounts to ensure you do not unintentionally damage your credit score.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Tend to collection accounts<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">If payments are not made on time, they can appear on your credit report as a damaging remark and remain there for seven years, reducing your credit score. If the debt is transferred to collections, the account will be marked as such, and your credit score will take a big hit. However, if you start making more responsible financial decisions, the negative effect on your score will gradually decrease.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Having a good credit score and financial well-being is important, so addressing any issues with creditors and debt collectors is key. You should review your credit reports if you&#8217;re unsure who to contact or how to pay off old collection accounts.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Before paying a lender, you should request a debt verification letter to make sure that you are the one being asked to pay. Also, double-check the balance and contact the original debtor to ensure you are working with a legitimate collection agency.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Longer credit history<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Having a long history of managing credit responsibly is a great way to boost a credit score. Keeping your oldest accounts active is essential to this, as the age of your credit accounts is considered. Be aware, however, that certain banks may cancel older, inactive accounts, so make sure to use them regularly to avoid this.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">A diverse credit mix<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Having a good credit mix is beneficial for your credit score. This includes having a combination of installment and revolving credit. Installment credit includes mortgages, student loans, auto loans, and personal loans, while revolving credit includes credit cards and lines of credit.&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.experian.com\/blogs\/ask-experian\/what-is-credit-mix-and-how-can-it-help-your-credit-score\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Experian<\/span><\/a><span data-preserver-spaces=\"true\">, one of the main credit bureaus, suggests that it is good to be mindful of your credit mix when trying to improve your credit score.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">New credit<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">It is important to be mindful of the number of new accounts you open or apply for. This does not mean that you should not open any at all, but you should be careful not to open too many simultaneously.&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.myfico.com\/credit-education\/credit-scores\/new-credit\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">FICO states<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;that when you open multiple accounts in a short period of time, it could be seen as a higher risk, especially for people who do not have a long credit history.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Be cautious of having too many hard inquiries in a short period of time. This kind of request usually happens when you are trying to get a loan or credit card. It means the lender is asking to review your full credit history to assess your financial risk.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Hard inquiries will stay on your credit report for two years and will change your FICO Score for one year. As mentioned, ask potential hard money lenders if and when they do hard credit pulls before applying.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Lenders may look into your credit history without it having a negative effect on your credit scores, known as a &#8220;soft pull,&#8221; which can be used to decide whether to pre-approve you for a loan or credit offer before you apply.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Final Thoughts<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Having a quality credit score is important for real estate investors because it is often one of the first things lenders will ask before providing a loan. When working with hard money or private money lenders, a good credit score can go a long way in landing your next deal.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">That being said, how important is your credit score in real estate? It\u2019s important, but there are ways to work with what you have. Research the above financing methods as you improve your credit, and you will be well on your way to building a successful real estate portfolio.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">It takes time and dedication to raise your FICO Score, and the rewards can be great for real estate investors. To stay financially healthy and maintain a good score, it is necessary to use credit responsibly and practice good financial habits. These habits will help you maintain a solid credit history.<\/span><\/p>\n\n\n\n<div class=\"wp-block-group border border-gray-200 p-6 rounded-md has-slate-50-background-color has-background\"><div class=\"wp-block-group__inner-container is-layout-flow wp-block-group-is-layout-flow\">\n    \n  <div \n    id=\"segemnt-view-event-block_624f52525847f\" \n    class=\"  \"\n    x-intersect:enter.once=\"\n      analytics.track('Kiavi Blog Sponsor View', {\n        referrer: 'https:\/\/www.biggerpockets.com\/blog\/credit-score-and-hard-money-loans',\n              })\n    \">\n    \n  <\/div>\n  \n\n\n<h3 class=\"wp-block-heading has-text-align-left mt-0\"><strong>This article is presented by Kiavi<\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-large is-resized\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/01\/kiavi.svg\" alt=\"kiavi logo\" class=\"wp-image-146504\" style=\"width:407px;height:80px\" width=\"407\" height=\"80\" title=\"\"><\/figure>\n\n\n\n<p class=\"has-medium-font-size\"><strong>See Your Rate Now<\/strong><\/p>\n\n\n\n<p>Robust capital, flexible loan options, and quick closes allow you to confidently make offers &amp; compete with cash.<\/p>\n\n\n\n<p class=\"has-small-font-size\"><em>DISCLAIMER: The above is provided as a convenience and for informational purposes only; it does not constitute an endorsement or an approval by Kiavi of any of the products, services or opinions of the corporation or organization or individual. The information provided does not, and is not intended to, constitute legal, tax, or investment advice. Kiavi bears no responsibility for the accuracy, legality, or content of any external content sources.<\/em><\/p>\n\n\n\n<div id=button-custom-event-block_63c9a33918e17 class='button-custom-event'>\n      <a href=\"https:\/\/www.kiavi.com\/biggerpockets?utm_source=biggerpockets&#038;utm_medium=content%20partner&#038;utm_campaign=BiggerPockets_PM_CP_Blog_Mix&#038;m_mdm=content%20partner&#038;m_src=biggerpockets&#038;m_cpn=BiggerPockets_PM_CP_Blog_Mix&#038;m_prd=direct&#038;m_fs=lead&#038;m_ct=html&#038;m_t=promo&#038;m_cta=Get%20Rate&#038;utm_content=202301_Blog_Mix_Sponsored-Blog_Mix_BPLP\" x-on:click=\"window.analytics.track(&#039;Sponsored Blog CTA Click&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/credit-score-and-hard-money-loans&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\" rel=\"noopener\">Learn More About Kiavi<\/a>\n  <\/div>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\"><\/div>\n<\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Good credit is a gateway to many great things, but how high does your score need to be to qualify for a hard money loan?<\/p>\n","protected":false},"author":613656,"featured_media":151334,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7403,7119],"tags":[],"class_list":["post-151331","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-private-money","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/151331","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613656"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=151331"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/151331\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/151334"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=151331"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=151331"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=151331"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}