I've noticed that a lot of people on the site come on and ask about how they can get started investing with a poor credit score and if that score even matters in real estate. I'd argue that it does. I think it makes one heck of a difference, and I believe that because it was just so easy for me to get financing on my first deal. All I did was apply for an FHA loan (a type of financing that probably makes sense for most people applying the "How to Hack Your Housing" strategy, and who also don't have tons of money for a full down payment plus repairs). After one 30 minute meeting, the lender confirmed my income, balances, and credit score - and then gave me a TON of money to buy this property. Change one variable in that equation, my credit score, and this becomes a nightmare. Nobody would have touched me with a ten foot pole if I had a rotten score. And the funny thing is - I've only been building credit for a little over a year! It's the difference between being able to buy almost any house, and only being able to buy a fantastic deal, AND having to convince private investors to back you. I think my way is MUCH easier, especially when getting started. From my personal experience, the biggest takeaway I have is that the only thing that really matters with regards to your credit score is not to screw it up! Maybe this was obvious to everyone already, but thinking about this led me to the following conclusion: My Credit Score is just as important as my reputation, and should be treated with equal importance. If you have a bad driving reputation, I would never let you borrow my car! That would be foolish on my part. The only way you could convince me was if you made some sort of demonstrable change and then... stopped crashing! It's the same thing with building your financial reputation. So what's the fastest way for someone with bad credit to improve their score? Stop missing bill payments, cut expenses or increase your income, and start paying those bills! What do you guys think? Is credit score very important in your financial background? Who's come back from a bad score - what did it take?

I am in the minority here, as I do not think credit really affects me. I like to buy with cash, and I know I am ready to buy another house when I have saved up enough cash. I don't have to worry about mortgage payments, and can afford to be generous with tenants if I so desire. Having a credit line is NOT the same as having a emergency fund. I know someone very close to me who quickly got into trouble with getting access to credit including having access to 20k unsecured credit. He had a super score, he has been yrs struggling to pay this off. I have been offered interest free money by my wife's relative, and I turned it down. I know a lot of people will not agree with this, but life is a lot simpler and more stress free when debt is not used. Credit score is simply a tool used to control the masses

@Scott Trench - I am going to take this back to your original post in a second. I've read most of the replies and they are getting away from the original post (but still in interesting and helpful dialogue). I started out working with people like @Jeff Rabinowitz that financed me on deals based on the deal itself. Please take that and think about it for a second, then compare it to your original post regarding how easy it was to borrow a lot of money simply because you had a good credit score. Here is my story - I started in real estate a few very long and painful years after a business and personal bankruptcy. I finished a large construction job in 2001 and the general contractor that had hired me failed to pay me for roughly 1/2 of the contract (a 6 figure loss). My house of cards collapsed and I suffered a long time as a result. In 2006 I became interested in RE investing. I had no money, I had hammered credit still, but I had knowledge, construction experience, and most importantly, desire and ambition that never quit. At that point, my ONLY borrowing option was private/hard money that based lending decisions on the deal itself, not my credit score. As a result, I became very good at finding only the best deals. Simply put, if it wasn't very good or outstanding, I couldn't close the deal. A side effect of this was that I mostly did home run deals. I did have a couple of dog deals, but for the most part I was able to get out of them at break even or with minimal loss. However, if the borrowing had been easier, I very likely would be bankrupt again by now. In short, having bad credit in the beginning protected me from myself, that's the bottom line. As previously stated, I had unlimited ambition and I presented a TON of deals to private/hard money lenders and almost all of them ended up in the garbage can. There were a few shining stars that I did get financed and most of them I still own. In my opinion, having good credit or "easy" access to money when starting out is a HUGE liability. You lose the advantage of more experienced eyes look at your deal before there is no turning back. Starting out the way I did, I still don't do a ton of deals, but every deal counts. I have good credit now and I have bankers starting to seek me out to lend me money. I have not for one second forgotten any of the lessons I learned when starting out though. I don't do any deal that doesn't have multiple positive exit strategies. I have much easier access to money now, but I also have a ton of respect for that and I will never ever abuse it. I will also say that, in spite of not doing a ton of deals, I have accumulated a significant amount of wealth. It is wild for me to think, as I write this, that the distance I have traveled financially in 8 years is simply amazing. Having good credit is indeed important. But knowing HOW to use good credit successfully is infinitely more important.

Whoa, whoa, whoa!!!!! Please hear me out on this! You're young, single, and healthy at this very moment, but that can change in an instant! Even if you don't get hit by a bus standing innocently on a street corner, trust me, in five minutes you will turn around and be *gasp!* 45 years old, married, and with a couple kids! My family taught me to pay cash for everything. Would you walk into a store and see signs on the top of a rack saying, "17.5% MORE!" and buy it? No, of course not! But if you don't pay your balance off each month, that is exactly what you are doing! Trust me, I had to learn that lesson the hard way. I stopped buying things on credit 8 years ago. If I don't have cash, I don't buy. Credit cards are no safety net!

Isn't that the truth. I have one adult daughter with high credit scores and credit limits. And virtually no income. Nobody's going to loan her any money to buy a house. Her credit score will help her get more unsecured, high interest credit. But that's about it. It's the income that hangs with the credit score that matters. Many self employed people with high credit scores have a very tough time getting bank loans these days. Even FHA will accept credit blemishes on already low qualifying scores.....if the income is consistent and documentable.

Oh my. Step back in time with me, just a little way, to around February 2009. Imagine you have a small retail business. You started it just a few years ago and it was going pretty darn well. At least until a few months ago, when sales suddenly started dropping. That's OK though, because you have just over $30,000 of available credit to see you through this slump. What's this? Oh look, the credit card company has sent you a nice little letter! Wait... they are changing their arrangement? They have decided that your credit line might be a little too high. Maybe $30,000 too high. Oh dear. Well, at least you can still make the payments, even though you don't have much income coming in. Until the next month... another letter from your friends at the credit card company. This one says that, regretfully, they will be raising your rates. It seems that since what you owe is now so close to your credit limit you are considered high risk. It's only reasonable that high risk equals higher rates, so your rate is now 27%.... True story, only it was me, not you. And mine was not an isolated instance, they were doing this sort of thing right, left, and center in 2008-2009. Will it happen again? Not anytime soon I hope, and I hope never to you. But don't count on credit card companies to be reasonable. The arrangements they make, while legal, are totally one sided. Don't trust them farther than you can throw 'em.

Credit cards and HELOCs should not be considered dependable emergency funds. In 2008-9 I suggested to my friends that had large open HELOCs to take out the funds asap or risk losing the available credit. Many of them were Boomers planning to use the HELOC funds to supplement their kid's college expenses. Some were newbie investors that were in over their heads and using the HELOCs to support their non-cashing flowing rentals. Sure enough, easily half of their lines were reduced, creating a loss of accessible and affordable credit. They were furious, as if they were entitled to $250K-500K lines on properties that had significantly decreased in value. Both my husband and I had business CC accounts that were in good standing and with good DTI ratios that were reduced during that period. Open credit lines are not money in the bank.

How Important is Your Credit Score?

James Wise

Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes

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A good credit score as well as a good debt to income ratio is vital when it comes to finding financing.

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Timothy Riley

Investor · Chicago, IL · Member since 2013 · 451 posts · 96 votes

11y

I've purchased with cash, quit claim, and contract for deed which didn't require any banks or credit. But I would argue that credit and debt to income ratio are extremely important even if it does nothing but widen your options. In my cases seeing that it wasn't necessary- if I fall into a financial jam having good credit can possibly get me out.

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Scott TrenchPro Member

OP

Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes

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Tim - I agree that that is an important aspect of having a great credit score - it gives you more leeway to make some mistakes and to take risks. If I have a great credit score and the ability to access $10,000 in credit, I may not need the "emergency fund" that a lot of personal financial advisors suggest. You already have that liquidity in the form of credit! This is a huge way to keep out of a financial jam and apply more of your cash towards investments.

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Jeff Rabinowitz

Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes

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@Scott Trench , even if you have closed on that $10K credit line the bank may freeze it with little, if any, notice. If you have not closed on it--well, lending standards can change very quickly. It would be foolish to count that $10K as your emergency fund unless you have direct control of it.

I occasionally fund some local rehabbers. I have closed appox. 50 deals and have never asked for or cared about the borrower's credit score. The loans were based primarily on my relationship to the borrower, the equity in the deal, the business model and my confidence that the borrower could execute their business model. I knew a couple of the borrowers had some foreclosures and a couple had a recent bankruptcy. There was enough equity in those deals that I was comfortable making the loans and the deals with those borrowers went very well.

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Scott TrenchPro Member

OP

Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes

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Originally posted by @Jeff Rabinowitz:

@Scott Trench , even if you have closed on that $10K credit line the bank may freeze it with little, if any, notice. If you have not closed on it--well, lending standards can change very quickly. It would be foolish to count that $10K as your emergency fund unless you have direct control of it.

I occasionally fund some local rehabbers. I have closed appox. 50 deals and have never asked for or cared about the borrower's credit score. The loans were based primarily on my relationship to the borrower, the equity in the deal, the business model and my confidence that the borrower could execute their business model. I knew a couple of the borrowers had some foreclosures and a couple had a recent bankruptcy. There was enough equity in those deals that I was comfortable making the loans and the deals with those borrowers went very well.

Jeff - In this case I was talking more about the credit on a credit card line of credit. I typically count that as part of my liquid emergency fund personally. Do you disagree with that? I feel that in most likely scenarios I can exit investments in stocks and bonds (though not REI necessarily!) within a few weeks to pay off any credit card debt I might have to take out.

Also - I agree completely that if you are able to find great deals and prove your worth as a rehabber that credit score becomes irrelevant - they are making you money! Like you said, the decision to lend is based on your subjective opinion and relationship with the borrower. On the other hand, if I have good credit, I don't have to convince a private lender to finance my first deal - I can just go to the bank and get a loan on a primary residence or put 20% down on an investment. A far easier task, usually at a far better rate.

How Important is Your Credit Score?

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