In a word, the most important element in residential real estate investing is FICO. Without a sufficient FICO score, the great thoughts of becoming a real estate investor should be put on hold, but only temporarily, at least until your credit allows you to qualify for 90 percent to 100 percent owner-occupied LTV loans. . On average, most lenders, prime or subprime, look for FICO scores in the range of more than 580 minimum.
The fundamentals of a successful real estate investment are based on an above-average credit profile. Unlike those ever-present late-night real estate infomercials that promise riches to anyone with a heartbeat and a valid credit card, the real world of buying a home, especially as an investor, requires a higher threshold of due diligence over oneself to maintain it. a good credit profile. It is not necessary to have an A + credit per se, just an above-average credit. As a former mortgage operations consultant, I worked in almost every major city with other consultants, where our job consisted of re-underwriting, auditing, and pricing loans, both prime and subprime, for client banks that were insuring their mortgage portfolios. for sale, usually to Wall Street investors. This experience allowed me to learn the dos and don’ts of applying for a loan. It also gave me insight into how lenders and banks think, and how they view the strengths and weaknesses of a buyer’s credit profile. Therefore, here are the following items to consider before becoming an active participant in the real estate investment field:
1. Go online and sign up for a membership in one of those credit monitoring services. The cost is approximately twenty five to fifty dollars and it is well worth it. The three main repositories (TransUnion, Experian, and Equifax) have these services.
2. Know what’s on your credit report and immediately address issues that will improve your score. Most online credit reporting providers offer a score simulator, which will provide what-if scenarios on how paying off or paying off certain debts can improve your score. Take advantage of this “crystal ball” credit management system as it will provide you with a roadmap to recovery that will better align you with your real estate investment aspirations.
3. Act promptly to remove these collection claims and judgments from your credit report. If the amounts are small, consider paying the balance in full, as a partial payment does not help the FICO score as much as if the claim were paid in full. Although it hurts to do this, to settle a debt or collection that may not be rightfully yours, consider this the cost of doing business. Trust me, this will be a test of looking at the “big picture” instead of worrying about the little things and getting excited. Making tough decisions to help you in the long run is strategic thinking. Overcoming some of these credit problems, if you have any, is part of that initial process. But canceling this debt will improve the FICO score and result in better financing conditions. In particular, better financing conditions translate into greater access to capital, which means a higher LTV, which is better suited to the real estate investment methodology, which dictates leverage as a fundamental cornerstone for a successful investment.
The last three points are just a few of the credit-related issues you should be aware of. Keep in mind that in the world of lenders, there are generally three types of loans. These are owner-occupied, non-owner-occupied, and second home loans. As an investor, you will qualify for non-owner-occupied loans, which have a slightly higher threshold in terms of qualification. Remember, obtaining an owner-occupied loan at 100 percent financing is generally not a problem. An investor will be required to put more money into the deal at the higher threshold. Despite that, the new and improved underwriting criteria enacted by the credit world and Wall Street some ten years ago have opened the door to millions of people in this country who previously could not buy houses. Thousands of investors can now also buy under current underwriting guidelines, relative to LTV requirements and FICO score minimums. This is a significant advance, since fifteen or twenty years ago, the average investor who bought a house as an investment would have to contribute between 15 and 20 percent.
So do your research and get the best loan that offers you the most leverage, which is a critical component of reducing risk. Also, know your credit profile, because if you don’t, the lender surely will. Hopefully, they will see it as a favorable risk.