When you need to borrow money for a real estate investment, traditional mortgage lenders DO care about your credit score, just like they do when you’re buying a residential home to live in.
If you have bad or poor credit (under 650), then it’s unlikely you can qualify for a loan. Borrowers with fair credit (650-699) are likely to be hit with a high-interest rate, making your monthly payments higher than if your credit was good. If you have good or excellent credit (700-850), then you’re in business!
But don’t fear; if your credit score is too low for you to qualify for a loan from a traditional mortgage lender, that doesn’t mean you can’t invest in real estate. Investors can tap into various forms of alternative financing, such as:
- Private money loans or hard money loans
- Online lending resources
- Cash purchase then refinancing
- Partnering with other investors
- Equity lines on existing holdings
In some cases, it may be advantageous to use a combination of these tactics. For example, you could borrow from a private lender to purchase a property. Then once you have it rented, you can refinance through a traditional lender and pay off the private money loan. Now that you have the asset (the property) as collateral, and it is earning revenue (the rental income), getting a traditional loan is often more feasible.
As a side note, private money lenders and hard money lenders are similar but not exactly the same. Here’s a quick overview of how they differ.
No matter your source of funding, be sure to understand fully what you’re getting into. Consult with a real estate attorney, and read all the fine print before you do a deal.