Investing in Real Estate Despite Bad Credit
Having bad credit can haunt a person. It seems that any advancement in life requires a credit check. A large purchase of a real estate investment can heavily rely on having a good credit score. While it can be difficult to obtain a mortgage with bad credit, it is not impossible.
Home Purchases versus Investment Purchases
Purchasing a home is much easier with poor credit. Lenders are much more likely to allow a person with poor credit to obtain a mortgage for a residence. If someone with bad credit is trying to purchase a property to fix and sell or to rent, it is another story.
Most lenders put a higher interest rate on investment properties and have much stricter rules. An investment property will need a much larger down payment. Lenders are concerned with lending money to someone if the house does not sell or if there is a lack of renters.
How to Invest Despite Bad Credit
A determined individual may still be able to invest in real estate, even if they do have bad credit. One option is to use a hard money lender. These are people or groups that are able to provide the money for investment properties. They are less concerned about a person’s credit because they will ask for more money up front. Instead of a typical twenty percent down, they may ask for up to sixty percent of the property’s cost.
Another option is to avoid putting any money down. There are some investors that will approach homeowners to sell their homes for a fee. These properties are usually sold as cash only. The investor makes money from the closing costs and sometimes from the buyer of the property. While these dealings are uncommon, it is a way to get more funds to invest later.
The Waiting Game
While many people do not want to wait to begin their investment career, this can be the best move for someone with poor credit. The better credit a person has, the easier time they will have with obtaining a loan. Working to improve credit over the course of a year or two can help a person have better credit, and save up more money for a down payment.
During this time period, track credit closely. Pull a credit statement and find any problem areas. If there is any account in collection, pay it off. Any discrepancies should be disputed and taken from the report as well. With all accounts in good standing, the score should gradually increase.
Avoid investing in smaller purchases. Buying a car or taking out personal loans can damage the credit more. Any additional credit accounts that are opened just before getting a mortgage will make the lenders uneasy. It is best to have stable finances for a good chunk of time before talking to a lender.
Bad credit does not have to ruin a person’s dreams of investing in real estate. While it is always easier to invest with good credit, it does not mean that someone cannot invest while they are working on increasing their credit score. Looking for a hard money lender or selling for a homeowner is a way to get started in the real estate business.