Your credit score is one of the most important assets you have as an investor. Even if you fund your deals with cash, you never know when you will need to use credit. In neglecting your credit in the short term, you leave yourself open to long-term repercussions. Something as minor as a late payment on a department store credit card can cause your score to drop. If it drops below a certain threshold, you may not have access to certain loan programs, credit cards or even private money lenders. Without these, you may not be able to keep your business moving forward. Even if you don’t rely on credit, you need to protect your credit score at all times. Here are five reasons you may need a strong credit score moving forward:
1. Investment Loan Purchase: This is the most common use of credit by an investor. Now, more than ever, you need a strong credit score if you are looking for any type of lender financing. The guidelines for an investment purchase are much different than that of a traditional purchase. If you are putting three percent down on a property that is to be your primary residence, you can get away with a credit score around 620. Investment purchases typically require scores well over 680, with anywhere from 20-25% down. A higher score will not only impact your loan approval, but it will give you a higher interest rate. The difference between a 678 score and a 681 could be one or two additional accounts, a late payment or a higher balance than usual. Even if you have never been late, your score could dip just by neglecting these areas. You may not have any need for a mortgage right now, but you never know what can happen in the future.
2. Cash Out Refinance: High credit scores will give you multiple options after you purchase the property. In much the same way that high scores are essential for an investment purchase, they are equally as critical if you intend to pull cash out of the property. In fact, a cash out refinance for an investment property may require even higher credit scores. This is important to note if you plan on renting for a year or so and want to refinance later. This could be the step that three or four other steps with the property are dependent on. The property may have strong equity and the debt to income may not be an issue, but unless your score is in the 700 range you will be without options. Low scores on a cash out refinance is not just a matter of getting a higher rate, it will directly impact your approval. Only a handful of lenders are doing these types of loans, and all of them currently require strong credit.
3. Credit Cards: Good credit scores are not essential in obtaining a credit card, but they are important if you want the best options. There are dozens of cards available for borrowers with damaged credit. The cards that offer bonus points, zero interest and minimal fees are reserved for borrowers with strong credit. You may never intend to use a credit card, but you never know when you will need one. There could be a rehab project that you are running low on cash and need credit to get you to the finish line. Without this access, you will be forced to scramble around looking for money. It is not advisable to rely heavily on credit cards to supplement cash, but there are times when they will come in handy in the short term. With a bad credit score, your options will be limited.
4. Niche Loan Programs: There are a small number of lenders who are now offering stated income purchase programs. Currently, these are only for investment properties and require strict guidelines. One of the first criteria that are looked at is the credit score. The common theme among all lenders is that the score must 680, with some lenders needing it to be over 700. With these programs, a higher credit score will equal a much lower interest rate. Much like using credit cards, these loans will not be for everyone, but having them at your disposal when you need them is nice. The more options you have, the better investor you will be.
5. Hard Money: For most hard money lenders, your credit score is not the most important factor when deciding to work with you. That being said, it still holds some level of importance. By having credit scores that are too low, they will view you as a risk and opt to go in a different direction. You may put on a great presentation and the property may be attractive, but poor credit may ultimately be the deciding factor. It is important to know where your credit scores stand at all times. Typically, the little items on a credit can do the most damage. The small medical account that you forgot about or the credit card that you only use every now and then are the ones that will pull your scores down. Hard money lenders may not decide solely based on your score, but it will be a consideration.
It is important to monitor your credit at all times. You may never think you will need credit, but the investing business has a way of changing your expectations.
