How Your Credit Influences Your Wealth Building Potential
Everyone talks about building wealth in real estate like it’s as simple as just finding the right property and then reaping the profits. What few people talk about is how you’ll never get anywhere with real estate investing unless you’re creditworthy. Deep pockets may not be enough when it comes to growing a real estate portfolio. Even some hard money lenders want to see that you know how to handle debt in a responsible way before they’ll lend you money. If you’re thinking of getting into real estate investing, you need to start by making your credit as good as you possibly can.
How Loan Applications are Processed Today
Mortgage lenders look at several things when determining if you’ll get a loan. But the important thing to understand about what mortgage lenders look at, is they don’t actuallylook at anything. Most mortgage lenders use certain software to make their lending decisions. The loan officer essentially punches in your data to the software and waits for the answer. It’s not quite that straightforward, but that’s the general process that takes place. In other words, there’s little you can do personally to ensure a positive outcome, except for making sure the loan officer has all your information in a timely manner and getting your credit as healthy as possible before applying.
What Mortgage Lenders Consider
Lenders take several things into consideration for mortgage loans. The two basic criteria are your credit score and your credit history. Your credit history impacts your credit score, so the two are interlinked. Once your credit score meets the minimum requirements for a loan, the next thing will be an in-depth look at your credit history. Lenders strive to get an overall picture of how you handle your finances. Not everything is as serious as you might think, while other issues might be more detrimental than you may realize.
For instance, if you have a bankruptcy in your past, you may still qualify for a loan at some point. Lenders typically want you to wait at least two years after the bankruptcy before they’ll consider you for a mortgage loan. If you have charge-offs under $2,000, these will count only minimally against you. But if you have outstanding collection accounts, lenders advise that you pay those off before applying for a mortgage. The collection account will still lower your credit score, but having an outstanding balance on a collection account also makes your credit history look worse.
Lenders look very carefully at charge cards, like the ones that retail stores ask you to take out when you buy something. Lenders want to see that you pay charge cards on time every month.
Finally, lenders like to see a debt ratio of only about 35% or less. This indicates that you’re not financing your lifestyle with credit.
Tips to Improve Your Credit Score and Credit History
If your credit is keeping you from being able to invest in real estate, you need to change that. Trying to get into real estate investing with bad credit will cripple your efforts. It may even result in you taking out a high interest loan and getting into even more serious financial trouble. Instead, be patient and improve your credit score and credit history with these tips before you apply for a mortgage.
Pay All Your Bills On Time
Late payments worsen your credit history. Each month, creditors report the date a payment was due, when you paid and how much you paid. If you pay late even one time, this weakens your credit history. Pay all your bills on time every single month.
Don’t Use Skip Payment Options
In certain cases, a lender such as a charge card company will send you an offer granting you the opportunity to skip a payment. This may happen in certain economic situations like a recession, or in areas where there has been a recent natural disaster. Don’t do this. The charge card company may not hit you with a fee, but the missed payment will still be reported as such on your credit report. If it’s at all possible for you to make your payment, do so. It’s worth it in the long run.
Review your credit report yourself before applying for a mortgage loan. Look carefully at each item to see if there are any errors. If you seen anything at all, open a dispute case with the credit agency. The creditor has 30 days to prove the information is correct; otherwise they have to remove it. If you are successful, you may be able to get some negative information removed, which will raise your score a few points.
Get Your Rent and Utilities Payments Reported
Apartment rent and utilities payments aren’t ordinarily reported to the credit agencies, but you can have this record added to your credit report. Obviously you only want to do this if you’ve paid your rent and utilities on time each month. There are third party sites that offer this service for a nominal fee. This positive payment history could substantially increase your credit score.
Take Out a Prepaid Charge Card
If your credit is really bad, you can improve it by taking out a prepaid charge card. These are cards with a Visa or Mastercard logo on them and you use them just like a regular charge card. The difference is that you deposit the cash into the account first. For example, you deposit $500. Then you’ll have a $500 line of credit on the card, minus any setup fees. Your monthly payments will be reported each month to the credit bureaus. After a certain period of on-time payments (depending on the card), your deposit will be returned to you and the card will function like a regular charge card. Some of these prepaid accounts can be opened with as little as $300, and it’s a good option for anyone with really bad credit. Over time, you’ll see your credit score creep up when you make on-time payments.
It can take many months for your credit score and history to improve, so it pays to get started improving your credit as soon as you can. Depending on how low your score is to start, it might be six months or longer before you’re ready to apply for a mortgage. But patience is key here, because the tips offered here will work to improve your credit. Don’t let bad credit stand in your way of creating long-term wealth with real estate investing.