A lot of the factors that make you a successful investor aren’t taken into consideration when credit bureaus assemble your reports. Your income, assets and holdings are certainly a big part of your overall financial package when seeking a loan, but when FICO puts together your credit score, they don’t get factored in — and lenders can’t just ignore your credit score for a lot of loan types unfortunately. Late payments and bankruptcies from years prior can pull down your score, as can high credit card balances, even if your overall debt load is low compared to your total wealth.
Can you work around a fair-to-meh credit score when investing? Absolutely. But it could cost you in the long run. Whether you’re just getting started or you’re wise to the game, here are some benefits to making a concerted effort to boost your score, even if you’re already a successful entrepreneur:
Even the best investors will need some liquidity in the short term once in a while. Whether you’re covering a financial gap when transferring properties or simply covering costs until the next big payday, short term loans are a great way to loosen up some cash when you need it.
Related: How to Improve Your Credit Score
They do, however, come with costs, at times featuring steeper interest rates than mortgage loans, even if you put down collateral up front. If you have substantial equity available, this may not be as much of a factor, but if you’re starting out, it can present a major hurdle. Receiving a better rate on your bridge loan bolsters your bottom line and helps you have more cash on hand when the next big opportunity comes along.
Jumbo Home Loan Rates
If you’re looking to build your investment by mortgaging an expensive property, you’re going to need a jumbo loan. Chances are you’re likely going to need a credit score of 720 to get any jumbo loan, regardless of interest rate and terms, with the best terms going to borrowers up above 760, according to Wall Street Journal.
If your strategy involves a buy and hold for any length of time, the difference between a half percentage point on a $750,000 or million dollar home can accumulate quickly and drag into your long term earnings on the property. For super wealthy homebuyers, paying an additional $1,500 or even $15,000 in a pinch over the course of a decade may seem like peanuts. As an entrepreneur with tight margins though, this cash can be a make or break difference.
Refi on Initial Loans
A lot of people will jump into an investment when market conditions are right, even if their financial situation means less-than-ideal lending terms. When this happens, you’re going to want to refinance your original loan –and do it while mortgage rates are going to yield the best results. Timing is important, and small differences in your credit score can mean big savings when it comes time to refi, especially for borrowers who signed onto an interest-only or other ballooning ARM loan to close on the property.
Related: Can You Invest in Real Estate With Bad Credit? (Maybe… Here Are 5 Ways to Do It)
And for borrowers who originated an FHA loan, refinancing to a conventional loan can save you money on mortgage insurance costs. Having an excellent credit score on hand when the market is perfect for refinancing means getting the best terms when you need them, anytime.
High End Credit Cards
But enough about loans, let’s talk about the perks that make it work. Improving your credit score means gaining access to, you guessed it, better lines of credit. People with exceptional scores are given the pick of the litter, from low interest rates to bonus points and cash back bonuses to discounts galore.
Above all, a big part of successful investing is being ready to adapt to changes in the market. Your credit score can be a great tool for securing funding and taking full advantage of what lenders have to offer. By pushing your score beyond good or very good and into an elite range, you’re not only ready to receive the best terms on a variety of loans, but do so without risking your creditworthiness when the next big break comes along.
Investors: How has your credit score affected your investing abilities?
Let me know your experiences with a comment!