One of the most important resources you have as an investor is your access to capital. This can come in the way of hard money, private financing or traditional lender mortgages. Regardless of the source of the money, the two most important areas of approval are your credit score and debt-to-income ratio. In most cases, your income will be a set number, leaving your credit score and liabilities as the two areas you have the most control over. One oversight in paying a bill can cause your score to tumble greatly, reducing the number of financing options you have available.
Your credit score has an impact on everything you do in the investing business. There may be ways to get financing with a below average score, but it will end up costing you more since your options will be limited. Private money lenders won’t pay as much attention to your score, but it still needs to be representative. Conversely, if you score is over 720, your options will open up with lenders, private money and even credit cards. The higher your score is, the more options you will have – giving you the chance to pick and choose the best program.
Maintaining a good score is a bit more complex than you may think, but it still starts with paying your debts on time. While it sounds obvious enough, this requires you to stay on top of all monthly liabilities, big and small. A late payment on a $100 department store card will count the same as a late car payment. You need to develop and maintain a system that can remind you of all bills that come in and help you pay them on time. It can be a little chaotic if you are involved in a few deals, working on a rehab and have issues with a rental property. You need to take the time to pay your bills or hire someone that can do it for you. Late payments have the greatest negative impact on your score than anything else.
Aside from late payments, the greatest negative impact on your score is if you are maxed out or near maxed out on your debts. This deals with any credit cards, automobiles, mortgages and any other liabilities you have on your credit report. If your score was a 722 two months ago and, in that time, you maxed out two of your cards, your score will take a drop even if every bill was paid on time. The reason for this is that being maxed out reduces your financing options and your ability to repay certain loans. Knowing this, you must keep as many open balances on as many accounts as possible. If you can pay cash for something that is the best remedy and what is best for your score. The amount of money you have in savings has no impact on your score. Paying everything on time is nice, but that is not enough to have an excellent score.
If you are adding more to each balance, your minimum monthly payment will increase. These payments are added to your total monthly debts and will increase your debt-to-income ratio. It is important to know what your ratios are before you apply for a mortgage. You can find your debts simply by looking at a copy of your credit report and using a mortgage calculator to estimate your new mortgage payment – including taxes and insurance. While cable, food and phone bills take up a chunk of your money every month, they are not calculated into your debt to income ratio. Only those items that are on the credit report are used. Look at these debts and see which ones can be reduced or eliminated altogether. If you have a high interest rate and a large monthly payment, but a smaller balance, it may make sense to use your savings and pay the card off all together. Controlling your debts goes a long way in your mortgage approval, especially if your income fluctuates annually.
The second half of the debt-to-income ratio is the income portion. If you are a W2 employee, your income is cut and dry. If you are self-employed or receive any type of commissions or rental income, the income you show is the income you can use. You should always have an idea of what your debt to income ratio is and what it would be on a prospective property.
Credit, income and monthly debts hold the key to a mortgage approval. Knowing what you can do to improve your score and lower your debts plays a huge role in your investing business. Every bill that you get and credit card you open can have an impact on a future purchase. Keep this in mind the next time you put off paying a bill until after the weekend that eventually turns into a late payment. Something as seemingly trivial as this can make a huge difference in your business.