If you want to buy an investment property, one of the first steps is getting your credit in order. Unfortunately, if you’re looking to buy a property but don’t have a high enough credit score, you may not qualify for a mortgage. However, there are several ways to improve your score and qualify for a loan. Read along as we review the importance of good credit and how to improve your score.
Contents of This Article:
- Why Buy an Investment Property?
- Do You Need Good Credit to Buy an Investment Property?
- Why You Should Improve Your Credit Score
- How to Improve Your Credit Score
- Manage Your Investment Property Professionally
Why Buy an Investment Property?
Whether you manage properties or hire Baltimore property management, buying an investment property is a great way to start or add to your rental business. That said, there are several types of investment properties, including single-family homes, apartments, or commercial buildings.
There are a few ways investors can make money with real estate. For instance, you can rent out the property to tenants and collect monthly rent payments. Or, you can fix and flip the property for a significant one-time profit.
Ultimately, the primary purpose of real estate investing is to generate income. However, it can be tricky to get started unless you have the credit to qualify for a loan. Read along as we go over the importance of good credit and how you could potentially get a loan without it.
Do You Need Good Credit to Buy an Investment Property?
You don’t necessarily need excellent credit to buy an investment property. Ultimately, it depends on your borrowing method. However, most traditional bank loans or mortgages require a minimum credit score.
Other financing methods, like hard money loans, may be more lenient with loan requirements. However, alternative financing methods often have higher interest rates or shorter loan terms. So ultimately, if you want the best rate on a mortgage, it’s crucial to have a decent credit score.
Most lenders require a minimum score of around 620 to get a mortgage loan. However, even if you already meet a lender’s minimum credit score requirement, you’ll still want to aim for the highest score possible. After all, there are several benefits to having a good credit score while buying an investment property. Here’s why it’s essential.
Why You Should Improve Your Credit Score
Most lenders base your loan’s terms on your creditworthiness, which is why you’ll want to achieve the best score possible. In addition, lower interest rates are generally used for consumers with good credit, which can make a massive difference in your total loan amount.
That said, here are three reasons why you should improve your credit score before buying an investment property.
- Easier Credit Approval
- Lower Interest Rates
- Better Loan Terms
Easier Credit Approval
When you have good credit, banks are more willing to approve your loan applications. In turn, when your credit score is high, you’ll likely be approved easier and much faster. Ultimately, it can speed up the entire process of getting your investment property.
Lower Interest Rates
With quicker credit approval, you could also get a lower interest rate if you have a good credit score. This is a significant win for investors since a lower interest rate can save you money. In addition, the less you have to pay on your loan, the more money you have to put into your rental business.
Better Loan Terms
Finally, you’re more likely to get better loan terms if you have good credit. For instance, you may receive a higher credit limit for a credit card or take out a low fixed-rate mortgage for your investment.
How to Improve Your Credit Score
If the benefits of good credit excite you, but you need to improve your score, there are several ways to boost it. Most lenders look at your FICO Score, which is influenced by these five factors: payment history, credit utilization, length of credit, new credit inquiries, and credit mix.
Here are five tips to consider if you want to boost your credit score before buying an investment property.
- Make Payments On Time
- Keep Credit Utilization Low
- Keep Old Credit Cards Open
- Avoid Applying for New Credit
- Credit Mix
Make Payments On Time
Making payments on time is crucial to maintain or improve your credit score. Payment history makes up 35% of your FICO Score, so missing payments can adversely affect your credit score. Just one missed payment can drop your score several points if it’s too far past due. So, ensure you make total payments on time whenever they’re due.
Keep Credit Utilization Low
Another major factor in your FICO Score is your credit utilization ratio, which refers to the amount of credit you’re currently using. It’s best to keep your credit utilization around 30% or less. So, if you have a $10,000 credit limit, try to keep total utilization around $3,000. If your balance exceeds the 30% mark, you’ll want to pay it off as quickly as possible.
Keep Old Credit Cards Open
Part of your credit score looks at the length of your credit history. After all, lenders want to see that you’re managing your credit responsibly over a significant period of time. That said, active credit accounts impact around 15% of your credit score. So when you close old credit accounts, it shortens the length of your credit history and can potentially lower your score.
Avoid Applying for New Credit
Opening or applying for several credit accounts in a short period of time can negatively impact your credit score. Too many inquiries can indicate risk, which can ultimately lower your score. So, if you’re trying to boost your credit score, wait at least 90 days between new credit card applications. If you can, try to wait at least six months to avoid lowering your credit score.
Credit Mix
Finally, the last major factor that impacts your credit score is the different types of credit accounts under your name. For instance, your score may increase if you have both revolving credit and installment credit. Revolving credit includes credit cards, while installment credit refers to a mortgage or car loan. However, you can still boost your credit score if you only have credit cards.
Manage Your Investment Property Professionally
Once you buy an investment property, you have to consider the next step–finding tenants. Luckily, if you have a comprehensive property management team on your side, you don’t have much work to do. Instead, you can count on your dedicated property managers to market properties, find tenants, and maintain rentals.
If you’re looking for rental property management near you, contact Bay Property Management Group. Our team of property managers can help you with all of your business needs. We offer services in Baltimore, Philadelphia, Northern Virginia, and Washington, DC.
