What’s a Good Credit Score for Financing Investment Properties?

Among everything that a property investor needs to consider, it’s essential to assess what’s a good credit score for financing the investment.

Table of Contents

1. What Is a Credit Score?
2. The Importance of Credit Score for Real Estate Investors
3. Cash vs. Mortgage for Buying an Investment Property
4. What’s a Good Credit Score to Qualify for a Mortgage?
5. How to Apply for a Mortgage to Buy an Investment Property?
6. Conclusion

As we continue to discuss what’s a good credit score to buy a house, it’s crucial for real estate investors to understand just how significant the credit score can be for their successful investment endeavors.

For starters, the lenders will use the investor’s credit score to check just how financially qualified they are. To put it simply, lenders use the credit score as an indicator that shows the risks associated with paying back the loan in a timely manner. The higher the credit score of the investor, the lower the risk for the lenders.

If you, as an investor, obtain a higher credit score, you can also expect to get approved for the loan faster. What’s more, a higher credit score also means lower interest rates. And when you enjoy the benefits of high credit, you also enjoy more freedom of negotiations with the lender.

What Is a Credit Score?

Essentially, a credit score points to the potential risk level of paying bills when due. It basically indicates the investor’s likelihood to regularly meet recurring monthly payments. When the credit score is higher, it tells the lender that the borrower (investor) is more likely to pay their debt on time.

The credit score is often referred to in order to assess all sorts of recurring debt payment risks, from loans and mortgages to utility bills and credit cards. It also plays a big role in determining the loan qualification in the first place, as well as the credit limit and interest rate.

In general, the credit score ranges anywhere from 300 to 850. The most common types of credit scores include the FICO Score and the VantageScore.

An individual starts generating a credit score once they secure a line of credit. It typically means owning a credit card at least. In that sense, it’s difficult to say what’s a good starting credit score as, in the beginning, it is bound to be around 300.

However, with smart money management and paying off debt in time, as your credit history grows, your credit score is only going to get higher. You will also get credit score points when you open different types of accounts and manage them properly.

Related: 5 Biggest Factors for Calculating Your Credit Score 

The Importance of Credit Score for Real Estate Investors

Obviously, good credit scores are a very important asset when it comes to getting a loan with proper interest rates. For a real estate investor, having what’s considered a good credit score may prove essential for making a property purchase.

However, there are also other elements that must be taken into account when we’re discussing a good credit score for financing investment properties.

Your Property Location

When you can’t purchase an investment property with cash, you’ll need to go with a mortgage. And in order to get a mortgage loan, the lender will need to analyze your credit score to see whether there’s any risk with you borrowing the money.

Now, if you can get a mortgage, you will still need to make monthly payments in order to return the loan. It is where the credit score will be an important part of the equation as well; namely, a bad credit score warrants a higher interest rate, meaning you’ll need to make higher monthly payments.

In that respect, mortgage lenders can easily deny a loan or dictate how much you’ll need to pay in monthly installments all based on your credit score. It will forces you to shift your attention to properties in other locations that may be less desirable.

However, zeroing in on the best place to invest in real estate can make a huge difference. The same goes for renting, as landlords also check the credit score to determine whether you’ll be able to pay rent regularly.

The Hiring/Promotion Process

You may not even be aware of it, but employers nowadays tend to check potential employees’ credit reports as a part of the hiring process. Of course, ut is not a credit score per se, but the entire credit report can still affect your chances of getting hired. For instance, if you show a low credit score, the employer may find you too financially irresponsible or believe that the salary they can offer you is too low.

The same thing tends to happen when employers needs to make a decision about a salary raise or promotion. If the position in question is related to finances, they will want to see just how reliable an employee can be based on their own credit report.

The Utility Prices

When it comes to buying investment properties, investors also need to consider the utility services after the purchase. Your credit score will also affect the price of the utilities. Just like mortgage lenders, utility companies are “lending” their services, and they need to make sure that you’ll pay for them. It includes electricity and water, and very often even cable, internet, and phone providers.

Getting Business Loans

Aside from personal loans, whether your credit score is good or not will impact your ability to get a business loan as well. For instance, if you plan to start an Airbnb business without actually holding cash, you’ll simply need to get a business loan. And in order to get one, you must show a good credit score for it.

Cash vs. Mortgage for Buying an Investment Property

Obviously, if you simply don’t possess the amount of money necessary to buy a property, the only logical solution would be to apply for a mortgage. But, if it happens that your cash is already enough cash to purchase an investment property, you may still wonder what’s the better path to take – cash or mortgage.

They both come with their advantages and disadvantages, so you should make sure to analyze them thoroughly before deciding which one is the right fit for you. In general, both strategies can be rather lucrative, but for different types of investors in the housing market 2022.

Buying a Property with Cash

There are several obvious benefits of financing an investment property with cash over a mortgage. For starters, the property, when purchased with cash, is not leveraged, which makes it easier to resell. If the property is worthy of paying with cash, it already comes with enough liquidity. Not to mention that for some investors, not worrying about recurring interest payments and closing costs is a huge benefit.

On the other hand, there are also some drawbacks when it comes to using all cash to buy investment properties. Investors must think about reduced return on investment (ROI). Also, cash purchases are subject to a limit as to how many properties can be purchased. It’s also necessary to mention that buying a property directly with cash makes room for increased litigation risk.

Buying a Property with a Mortgage

Just like there are benefits to buying a property with cash, a mortgage comes with its own advantages. While it’s true that there are recurring payments and closing costs involved, a mortgage provides certain tax benefits as well.

Furthermore, there’s a better chance of enjoying higher ROI later on. Also, the fact that the property is mortgaged can serve as protection from creditors.

Of course, there are drawbacks to mortgage loans as well. A conventional lender or central bank might limit the number of loans for the investor. If you take on more mortgage loans, your loan to value (LTV) might go down.

What’s a Good Credit Score to Qualify for a Mortgage?

As mentioned, there are different types of credit scores. In that sense, what’s a good credit score for a mortgage will also differ based on the said type. However, we’ll focus on the two most important types of credit score, namely FICO Score and VantageScore.

When we talk about what is the highest credit score, in the case of both FICO and VantageScore, that number is 850. But, the good credit score chart for the rest is a bit different.

That said, a credit score range between 670 and 739 on FICO Score is considered good, a range between 740 and 799 is very good, while everything from 800 to 850 is deemed excellent.

On the other hand, a credit score in the range between 580 and 669 is considered fair, while anything between 300 and 579 is considered a very poor credit score.

In the case of VantageScore, falling anywhere in the range between 700 and 749 is considered good, while everything from 750 to 850 is excellent.

On the other hand, a credit score in the range between 650 and 699 is considered fair, between 550 and 649 poor, while being anywhere from 300 to 549 means your credit score is bad.

It’s not that simple to answer what’s a really good credit score as the range will differ based on different kinds of purchases and investments. But, we can generally state that in most cases, real estate investing requires a score of around 620, with 720 and above is a very good credit score.

Related: How Can You Improve Your Credit Score for Financing Investment Properties? 

How to Apply for a Mortgage to Buy an Investment Property?

Obviously, you need to check your credit score before applying for a mortgage and making such a huge financial decision. If you’re a beginner investor, it’s important to know what’s a good credit score for a first-time home buyer and make sure that you fit in the range. An easy way to do so is to utilize available real estate investment software like Mashvisor.

Take Time to Prepare

Once you know your credit score and you find it suitable for financing an investment property, there are some additional preparation steps to consider. That said, it’s important to do your research and find a lender that’s reputable and trustworthy. After all, you might be in such a partnership for up to the next three decades.

Make sure to choose a mortgage type that fits your investment style the best. You can decide on 15- or 30-year mortgages, mortgages with adjustable rates, or even the US government mortgages if you meet the requirements.

To save yourself the headache during the process, gather all the necessary documentation beforehand, such as your asset listings, your financial debts and obligations, proof of steady income, etc.

Start the Process

Now, before you actually go to the lender to ask for a loan, give an offer to the seller for the property you want to buy. If the seller accepts your offer, you can then apply for a mortgage. There’s time to get the necessary funding before the closing date.

Go to the several lenders you researched before and found reliable. Examine their interest rates, loan period, and fees, among other things. Find the one lender with the best loan options and start the application process. It takes some time for the loan to be processed. So, be patient and respond to all the possible queries from the lender as soon as possible.

When the time to close on the mortgage comes, all you need to do is review the closing statement and sign the necessary paperwork.

Related: Mortgage Rates: The Real Estate Investor’s Complete Guide 

Conclusion

By knowing what’s a good credit score for financing investment properties, real estate investors can take the necessary steps to improve their credit scores further. What’s more, when you’re aware of your credit score, you can also identify the ideal investment properties that fit your budget and qualifications.

Of course, note that some lenders may decide to set their own requirements and credit score ranges, which is why prior research is necessary to make the best financial decision without wasting your time.

That said, Mashvisor’s set of tools can help you save both time and money on making your investment decisions. Investors can access a wide range of reliable and accurate data that allows for quick property analysis of the housing market.

In terms of the mortgage, Mashvisor’s mortgage calculator can provide a quick estimate of the potential mortgage payments. Together with the investment property calculator, you can gain crucial insight into valuable metrics, such as the property’s ROI, cap rate, cash on cash return, and more.

You’re welcome to give Mashvisor a try and see for yourself just how helpful and efficient the tools can be by signing up for a free 7-day trial.