You’ll need to understand credit if you want to make any substantial financial investment, most especially in the real estate market. One of the most valuable assets a real estate investor may have is a good credit score.
Quality credit scores have the capacity to not only keep competitive property loan rates but also to increase a borrower’s negotiation strength. While a lower credit score does not automatically rule out potential investors, this crucial figure may limit your access to specific loan programs.
Before we delve into why credit score really matters for real estate investors, let’s take a step back and define what credit score is.
What is a Credit Score
A credit score is a three-digit number that evaluates an individual’s creditworthiness based on a variety of criteria. Credit scores are used by lenders to assess the likelihood of a borrower repaying a loan on time. It is calculated using information from your credit history, such as the number of accounts you have open, the total amount of debt you owe, and your repayment history among other things.
Credit scores are also significant for a variety of financial transactions and investments. The credit score influences things like opening a new credit card, buying a new house, purchasing a new car, and even transferring cell phone service providers.
What is a Good Credit Score
The Fair Isaac Corporation, often known as FICO, developed the credit score model, which is utilized by financial institutions. Although there are several credit-scoring systems, the FICO score is by far the most prominent. Since there are different types of credit scores, what is a good credit score will vary from one type to the next.
A FICO credit score is calculated in points:
- Bad Credit: 300 – 600
- Poor Credit: 600 – 649
- Fair Credit: 650 – 699
- Good Credit: 700 – 749
- Excellent Credit: 750 – 850
A credit score of less than 600 is generally considered poor, and borrowers with scores in this range will have trouble getting a loan. A score of 740 or more is regarded as excellent and will assist you in getting the best available rates.
How are Credit Scores Calculated
FICO determines your score based on five major factors:
- Payment history: 35%
- How much you owe/credit utilization: 30%
- Length of credit you use: 15%
- Types of credit you use: 10%
- New credit inquiries: 10%
Why Credit Scores Are Important
For potential real estate investors, having a quality credit score has significant implications. It all comes down to some factors below:
- A credit score indicates to lenders your capacity to repay a loan.
- Your credit score helps to determine the interest rates that you pay for loans.
- Quality credit scores can help you qualify for more loan programs so you can purchase more properties and produce greater profits.
- A credit score is used by insurance firms to decide whether or not to grant insurance to a consumer, not just in the real estate business.
The Bottom Line
The benefit of a good credit score should never be underestimated, particularly by real estate investors. Great credit translates to better deals and cost-cutting strategies, giving you more opportunities for financing real estate and navigating the loan process.
So when it comes to investing in real estate, investors must constantly aim to keep their credit score as high as possible. A good credit score will almost certainly have a positive impact and be advantageous for sealing the best deal with your lender.
At Pacific Equity & Loan, we believe in investors’ potential to succeed that is why we prioritize offering flexible terms, fair rates, and fast closings. We’re here to provide your capital needs, simply tell us how we can help you and we’ll discuss we’re a good fit for you and your projects!
“What Is the Importance of Credit Score in Real Estate Investment?” AZ Big Media, 19 Apr. 2020, azbigmedia.com/real-estate/what-is-the-importance-of-credit-score-in-real-estate-investment.
Seth, Shobhit. “The Most Important Factors for Real Estate Investing.” Investopedia, 30 Dec. 2021, www.investopedia.com/articles/investing/110614/most-important-factors-investing-real-estate.asp.
Abdul-Samad, Hamza. “What Is a Good Credit Score? Everything Real Estate Investors Should Know.” Investment Property Tips | Mashvisor Real Estate Blog, 4 Jan. 2022, www.mashvisor.com/blog/what-is-a-good-credit-score.
Frankel, Matt. “What Credit Score Do You Need for an Investment Property?” Millionacres, 4 Mar. 2021, www.millionacres.com/real-estate-basics/articles/what-credit-score-do-you-need-investment-property/.