We all know that real estate investment is a wonderful way to safeguard our financial future. In the United States, there are about 44 million tenants who have occupied houses compared to owner-occupied homes of 75 million. It's understandable that you'd be attracted to buy a new home given the abundance of residential developments available at reasonable rates.
However, if you haven't kept up with your credit history, you may be unsure how to proceed. If you want to take out a house loan to purchase a new home, your credit score will come into play. We'll give you a quick rundown of what a poor credit score entails if you're not sure.
Investing in real estate with a low credit score?
A credit score is a numerical representation of a person's creditworthiness or capacity to repay a debt. To determine your loan eligibility, banks or lending companies look at your credit score. It's a three-digit number between 300 and 900. It's determined by your prior credit payment history. If your credit score is over 650, you have a better chance of having a loan approved.
Don't give up hope if you haven't been able to get a good credit score. You may still invest in real estate if you have a poor credit score. Put your concerns aside and continue reading to see how you may still purchase a home with a poor credit score.
Ways to invest in real estate while having poor credit
A smart approach to invest in real estate is to form a real estate partnership with someone you trust. You may utilise the credit advantages of an investing partner with a strong credit score to buy a home if you can locate one. The financial load may be divided in this situation between you and your spouse. In addition, the earnings will be divided among the partners according to the terms of the agreement.
To prevent disputes, create a contract agreement that is reviewed and signed by both parties before entering into a real estate partnership. A real estate partnership will enable you to make bigger investments, which will result in higher future profits.
1. Hard money loans
If you have a poor credit score and are having trouble getting a bank to approve a house loan, you may look into hard money loans. A hard money loan is a short-term loan secured by real estate that is financed by private investors (individuals or companies).
Hard money loans are typically for 12 months, although they may be extended for up to two or five years. The interest rates on hard money loans are comparatively higher than traditional house loans from banks or financial organisations.
Not only are hard money loan offerings perfect for a fix and flip investment approach, but obtaining a hard money loan with a poor credit score is not a problem since these lenders do not adhere to stringent credit score laws and standards.
2. Investing in real estate investment trusts (REITs)
If you want to invest in real estate but aren't sure where to start, REITs are a good choice (Real Estate Investment Trusts). A real estate investment trust (REIT) is a business that combines money from several investors to make commercial investments. Rather than purchasing a property on your own, you may invest in a REIT and combine your funds with other investors.
A Real Estate Investment Trust (REIT) rents property and collects rent to pay to stockholders as dividends. This technique may assist you in increasing your money and improving your credit score over time. You may profit from REITs without having to purchase or manage the buildings yourself.
3. Fix-and-flip method
If you are unable to purchase a brand new house, do not despair; you can always begin by purchasing a distressed property at a low price. You may be able to obtain a lower loan amount if you want to buy an older home that requires work. After purchasing this property, you may remodel it and sell it for a profit.
This investing technique is known as fix and flip, and it allows you to make a lot of money in a short amount of time. Although this technique requires more work than purchasing a new home, it requires less financial investment, making it more accessible to individuals with poor credit. Make sure you choose a property with a favourable location.
4. Get a cosigner for a loan.
If your credit score isn't strong enough to get a loan approved, look for a co-signer who has a decent credit score. It may be a family member or a close friend who is ready to serve as a loan guarantor. Make sure you can afford to pay the monthly loan EMIs before taking out the loan. Failure to make your loan payments puts you in jeopardy, but it also puts your co-signer in jeopardy. If you pay your EMIs on time and in full, you will see that your credit score progressively improves.
5. Increased down payments
If you have a substantial sum of money set up for a down payment, you may be able to obtain a loan on this basis. That is, if you can pay 20% or more of the loan amount in advance, you may be able to get a house loan despite having a bad credit score.
A larger down payment may qualify you for the desired loan amount since it demonstrates the borrower's financial soundness. Although this approach is time-consuming since it requires a significant amount of money to be saved, you will have the pleasure of purchasing a home based on your credit.
6. Wholesaling real estate
Another way to invest in real estate with a poor credit score is via real estate wholesaling. A wholesaler contracts a property with a seller and then finds a suitable buyer who can acquire it at a greater price. The price difference will be considered a profit. Real estate investors use wholesaling as one of the greatest short-term investing strategies.
It's also a fantastic way for newcomers to get into real estate investing since it doesn't need a lot of money to get started. Distressed properties are often found and contracted by real estate wholesalers. To be profitable, wholesaling requires excellent marketing abilities. To conduct wholesaling in certain areas, you may additionally require a real estate licence.
Improve your credit score
While these suggestions will assist you in getting started in property investment, it is important that you concentrate on improving your credit score in order to make successful investments in the future. A better credit score can qualify you for a larger loan amount with lower interest rates. So begin making timely payments on EMIs and credit card fees and reap the benefits.
Grant McDonald has more than three decades of experience in the real estate industry and more than a decade in the real estate finance space. He is currently Vice President - Corporate Development at 14th Street Capital - America’s premier hard money lenders for real estate investors.
