Many real estate investors begin their journey by buying a home that they can fix and sell or live for a while and then put up later in the market after five years. Probably this is the path you want to take for yourself. The problem is you have bad credit, which makes you less attractive to lenders.
What do you do then?
First, Why Does a Credit Score Matter When Borrowing?
Lenders use credit reports to assess the risk that you will default on your loan. If you have a bad credit score, it means that even if you have the money to pay the mortgage, you might still default because of an unexpected financial problem or a lost job. In the end, it increases the chances of the lender losing money.
Even if you obtain a home loan, a low credit score will still be unfavorable because you will be paying a higher interest rate and a possibly shorter payment term. The kinds of mortgages you can apply for will also be limited.
How to Get Real Estate Funding When You Have Bad Credit
Having bad credit will make it challenging to raise funds to buy a home for investing. But it doesn’t mean it’s not possible. Here are some ideas:
1. Give Yourself Time to Fix Your Credit Score
If you don’t need to buy a home now, give yourself at least six months to a year to repair your bad credit score. Within this time, check your credit report for errors and dispute them.
Pay your bills on time, every time. Don’t max out your credit cards to maintain a low credit utilization ratio. Avoid any loans or applications that will result in a hard inquiry. Maximize programs offered by credit bureaus like Experian Boost.
2. Get a Hard Money Loan
A hard money loan is a short-term loan with the property as collateral. Unlike traditional loans, this one considers the deal’s profitability over the debt-to-income ratio and credit score.
When you apply for hard money loans for bad credit, interest rates will be higher than conventional mortgages. You will still pay costs like origination fees. However, the processing time is fast. You will receive the funding you need in 15 days or less.
3. Use a Home Equity Line of Credit as Collateral
A home equity line of credit is a second mortgage that allows you to borrow money anytime. First, the lender will give the funds as a lump sum. Then you can pay it back in installments or all at once.
This option for investors with bad credit can be helpful for those who need funds to fix or rent out the property. You can pay back the lender as you go and keep the loan open until needed again.
However, if you default on your payments, you will be charged a high interest rate and incur late fees.
4. Offer a Larger Down Payment
Many lenders are willing to make loans with down payments as low as five percent. It means that if you have saved only 5 percent of the total cost, you will need a little help.
You can increase your chances of getting approved by offering more money upfront. For example, instead of providing 3 percent, give 10 percent. Better yet, strive for a 20 percent down payment. Not only does it make lenders feel comfortable dealing with you, but it also prevents you from paying private mortgage insurance (PMI).
5. Lend from Friends and Relatives
Another possibility is to reach out to friends or relatives for financing help. You can ask them if they are willing to lend you money in exchange for monthly payments until you finish paying the loan or sell the property.
Another is to partner with them in securing a loan. If your friend or a family member has a better credit score than you, they can apply on your behalf while you become a co-signor or co-borrower.
This strategy may not be an option for everyone, but it’s worth trying because your down payment will still come from you, not a bank. It can be perfect for those looking to invest in real estate but don’t have enough money but might need only a few thousand dollars.
6. Find Home Loan Programs That Accept Low Credit Scores
If you can look past conventional mortgages, you will see that some home loan programs accept applicants with low credit scores. One of these is the FHA loan.
The Federal Housing Administration (FHA) doesn’t offer loans directly but instead insures them. This way, lenders will feel more comfortable working with low-income, bad-credit borrowers. Among these is a lower credit score requirement of 580, which you can achieve with a bit of help from your credit repair team.
It also requires a lower down payment of only 3 percent. However, if you increase that even to just 5 percent, you will likely obtain the mortgage even if your credit score is 500.
The best strategy to access plenty of financing options is to repair bad credit. But the other ideas on this list can help you move forward with your plan of buying real estate property even if you have low scores.