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?

The credit card companies can and do cancel credit cards that are inactive or when you experience an adverse event. That credit line you are counting on may disappear at exactly the time you need it most. It is NOT an emergency fund. I disagree with your assessment of bank financing. It is the most difficult and time consuming to secure. If you qualify, have time and are willing to jump through the hoops you will probably secure a lower interest rate than you would with a private lender (certainly lower than I loan at). If you are putting 20% down on your deals you will have access to many types of lenders. Most of my borrowers (partners) could easily qualify for bank lending at much lower rates than I charge. They come to me because they know that if I say I will fund that they can count on it. I have a couple borrowers with whom I have done more than 6 deals. I sometimes forget to ask them for comps when they ask for another loan. I have closed deals with them in 10 minute conversations. They need fast commitments to secure their deals--they can't get that from the bank. Yes, they pay a high interest rate but they are usually in and out of their deals quickly and they find great deals--they earn much more than I do. I sometimes joke that the banks take 30 to 45 days to deny a loan--I can do that in 5 minutes.

@Scott Trench "credit on a credit card line of credit. I typically count that as part of my liquid emergency fund personally."CC companies are a bunch of insert explicative. Let's say you buy $10,000 on your CC and your current rate is 10%. When I was late on a few payments, I have had CC companies bump mine to 30%. Not going on new purchases but on the $10,000 I bought in the past.

@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.

How Important is Your Credit Score?

Andy Collins

SFR Investor · Dallas, TX · Member since 2011 · 604 posts · 243 votes

11y

The farther you get into REI, the more your credit score can help, or hurt you. If your trying to get a conforming mortgage #5 or above, you have to have a 720 mid score,,have a 775 or so mid score, and you can access cash pretty easily anytime.

You could do REI without good credit, but you could also run a marathon with a 50 lb pack on,,,I choose to do things the easier way, and credit can defanately make your life easier

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Teresa F.

Residential Real Estate Broker · Clinton, MD · Member since 2008 · 297 posts · 178 votes

11y

Perhaps it is because I am a buy and hold investor that I think credit is so critical. I've never used hard money because I am one of those crazy people who has bought property using credit cards ( zero interest for 16 months) and paid it off. My good credit has allowed my business to get bank loans to buy additional properties and, when needed, to pay off those credit cards.

While the need for good credit may depend on the type of investing you do, it has certainly served me well and has provided me with added credibility when dealing with money folks of all sorts.

Teresa

p.s. It also helped my company buy my new car. ; )

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Account Closed

Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes

11y

Originally posted by @Jeff Rabinowitz:

Many people I know, with good credit, have had credit cards cancelled in the last few years. I believe I had one cancelled for inactivity--my only notice was that it had been cancelled. Many banks have closed many inactive lines. The banks reevaluate their credit card businesses on an ongoing basis and they are not obligated to keep any cards open that they do not wish to. Look at the terms of you cc agreements. I would venture that all of them state they may do this and they do not have to give you advance notice.

I have funded one rehabber on his first deal. There was enough equity that I was comfortable doing so and the property was in an area I knew well. I suspect it was one of the easiest transactions this guy ever did as I drew up the documents and did not ask for any bank statements, proof of income, credit reports or the other myriad reports that banks require. I also didn't require him to get an appraisal (I knew the value of the property) or a survey or incur any extra fees. I was confident I was protected in the event I had to foreclose and dispose of the property.

This is meant to correct what seems like a misconception you have. I believe you may find yourself in a difficult position if you equate a credit card with an easily accessible emergency fund and that you may be discounting possibilities before you understand them. That is your prerogative, of course, and I wish you well on your real estate journey.

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.

2 Reply

Kendall T.

Real Estate Investor · Fort Pierce, FL · Member since 2014 · 132 posts · 57 votes

11y

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

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Jeff Rabinowitz

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

11y

@Kendall T. l would never advise anyone to intentionally trash their credit score but if a situation arose and a business decision meant that one's credit score would drop...it is a consideration but it is not the end of the world. You may pay more for some things, as was stated earlier, like insurance, but even if your insurance costs increased 50% I suspect a good rental property could cover that expense. A low credit score will definitely make bank financing more difficult but when bank lending is tight that avenue isn't available even to those with good credit. Recent history proves that. The banks love to lend to people who do not need their funds and even then the paperwork is ridiculous and the time one must wait for a decision makes many investments (especially great real estate deals) impossible. I have a good credit score but I hope to deal with banks less and less. I suspect it will not be long before some of my real estate partners, some of those I have helped fund deals for, will be my best sources of funds if I need funding for my projects.

I am pleased that some of the investors I am working with are doing extremely well. I share a small part of their success and learn from them while I help them build their businesses. The partnerships make all of us better investors.

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Franklin Romine

Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes

11y

Credit score helps the general population the most. Many Salt Mine workers have a + 800 credit score but have little borrowing capacity and a handful of good clean store credit cards. Does this mean they can go out and buy investment properties and or a primary residence?... no.

Credit history and income are more important. Yes the score plays a role. Being proud of a high credit score and very little debt and nothing else in the pipeline or on your tax return doesn't create a mountain of assets.

1 Reply

Account Closed

Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes

11y

Originally posted by @Franklin Romine:

Credit score helps the general population the most. Many Salt Mine workers have a + 800 credit score but have little borrowing capacity and a handful of good clean store credit cards. Does this mean they can go out and buy investment properties and or a primary residence?... no.

Credit history and income are more important. Yes the score plays a role. Being proud of a high credit score and very little debt and nothing else in the pipeline or on your tax return doesn't create a mountain of assets.

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.

2 Reply

Account Closed

Kirkland, WA · Member since 2014 · 71 posts · 18 votes

11y

Originally posted by @Scott Trench:

Originally posted by @Lynn McGeein:

@Scott Trench , think your statement about keeping your credit score up being as important as your reputation is spot on, but also wanted to add that you do need to be careful with considering credit cards as emergency funds. Just know that many cards will charge a fee, 2-3% for any cash advances, plus a higher interest rate than regular purchases. Oh, and they can arbitrarily decide to drop your limit and/or cancel the card. Thinking they won't is naive. I've also had issues where all of the sudden they freeze charges, then say it's because they thought it was fraud. Usually very bad timing is involved, like right when you need it most. You need a cash reserve, even with a 401K or a nice credit card balance.

Also, as you add more loans for more properties, be aware that your credit score drops just because ... no idea exactly why as our properties cash flow and we've never been late on any payment, ever, but our 800+ days seem long gone and we're happy now when we see 720, even though the only difference is more installment loans for investment property.

Lynn,

Thanks for the feedback. I've gotten quite a few questioning remarks about the wisdom of allowing credit cards to be a source of emergency funds. I'm looking into that - perhaps there are some uncomfortable risks with that strategy. Perhaps its just because I'm still young single, and healthy, that I think that makes sense. I've never really had an emergency that would have devastated me financially or put me in a very bad position.

I think that I will take your advice and that of @Jeff Rabinowitz and make sure that I have a nice cash fund to supplement my credit lines!

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!

2 Reply

Scott TrenchPro Member

OP

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

11y

Thanks @Account Closed ! I am certainly coming around to this line of thinking as the discussion has moved forward. I'm glad I posted the topic and learned a little something from everyone.

Podcast Guest on Show #223

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Mark S.Pro Member

Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes

11y

@Scott Trench , I totally get what you're saying about the credit cards. Personally, I am a fan if a similar strategy that you're speaking of, but I do keep more in cash. Right now, I have my "emergency funds" split among: 33% high yield checking account paying me 3.00% APY/ 33% individual stock in brokerage account / 33% in mutual fund account invested in a mutual fund that does well in a rising interest rate environment (which, may take a while, but we'll get there. This is in addition to IRA, Roth IRA, 401(k), etc. I also have decent credit limits on my two credit cards with a credit score in the 760+ area. Basically, all you're saying (which, for some strange reason a couple of folks don't seem to understand) is that you're using the credit cards as a very short term bridge between the time your sell orders go in, your trades settle, and the money gets transferred to your bank account to pay off the CC. In my opinion, there is absolutely nothing wrong with that, ESPECIALLY if you have a great credit score. Even if your credit cards got shut down, chances are the merchant you're needing to make an emergency purchase from would have some financing available, or at least be able to work out some mutually agreeable terms.

Also, something that I don't think was mentioned yet that I think could be VERY appropriate IN THIS PARTICULAR SITUATION, is that most 401(k) plans offer loans. You could take a general purpose loan, and as long as it's paid back according to schedule, it's not a reportable event to the IRS. Disclaimer: I do not provide tax or legal advice. However, with that said, if you work for a large company and your 401(k) is administered by a third party administrator that allows you to complete the loan application online, you could probably have a check in hand in a week or so. No, it's not immediate like a credit card, but depending on the situation, this COULD be a possible short term solution as well. You can generally get a loan for 50% of your account balance up to $50K. Just sayin'.

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Kirk R.

Peoria, IL · Member since 2013 · 967 posts · 383 votes

11y

My cpa say no 401k loan. This is way most people might end up with irs problem.

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Adam Johnson

Rental Property Investor · Holley, NY · Member since 2011 · 507 posts · 347 votes

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@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.

3 Reply

Jean BolgerPro Member

Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes

11y

Originally posted by @Scott Trench:

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.

2 Reply

Jeff Rabinowitz

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

11y

@Adam Johnson, nicely said. I really don't finance many deals. I do this mostly out of my IRA for local investors who have taken the time to develop a relationship, share their progress with me and are people with whom I think I would like to work and who I think would be willing to listen to my suggestions if the need arises. I don't look at just the deal but if the deal does not look like it is strong enough to cover the rate I charge, protect me in the unlikely event that I will have to foreclose and put some money in the pocket of the borrower at the end I will probably pass. I care about the borrower's reputation not their FICO score. I want my partners to do well so we have the opportunity to do many more deals. I am thrilled that some are doing well enough that it may not be long before I am able to turn to them for the same sort of assistance that they are now turning to me for. Real estate is a lot more fun as a team sport.

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How Important is Your Credit Score?

How Important is Your Credit Score?

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