Unfortunately, your credit score can make or break a loan application. If you have bad credit, qualifying for a loan can pose a serious obstacle. As a result, I’m frequently asked: how can I finance a house with bad credit?
Investors can finance an investment property with hard money lenders, even if you have bad credit. But, you should still work on improving your credit score. When you eventually apply for a traditional mortgage on investment property, a higher credit score will get you a lower interest rate.
How credit scores impact you as a real estate investor? There are several other ways you can use to get a loan as well, although with a bad credit. In this article, I will discuss a few ways you can use to finance a house with bad credit.
Why Credit Is Important for Real Estate Investors
For better or worse, people judge us by our credit. Landlords, banks, and credit cards (among others) view us through the lens of our credit scores. If you have good credit, people deem you a reliable borrower. Conversely, bad credit leads many people to categorize you as unreliable or, at worst, untrustworthy.
This credit score judgment translates directly into dollars and cents for real estate investors. If you have bad credit, most traditional lenders will not provide you a loan. Simply put, you won’t be able to secure a mortgage for an investment property. And, even if you do get a loan, a bad credit score will mean you’ll need to pay higher interest rates. Higher rates can translate into tens of thousands of dollars in additional interest charges over the life of a loan.
Can you invest in real estate with bad credit? Yes, absolutely, and I’ll outline different strategies to do so in this article. But, good credit definitely makes investing easier.
Start Improving Your Credit Score Immediately
Having outlined the importance of credit, real estate investors need to take a step back. Before asking how to finance a house with bad credit, they should ask how can I improve my credit score? Frankly, real estate investing and improving your credit score aren’t mutually exclusive. You can focus on improving your score while still investing.
As such, start improving your score as soon as possible. It can take a while to see results, so the earlier you start, the better. And, improving your score will open more investing opportunities in the future.
Broadly speaking, you have two options to improve your score:
- Do it yourself: You can request a free copy of your credit report from any of the major credit bureaus (e.g. Experian, Equifax, etc.). This report will outline the major items hurting your credit score. You can use this report to gradually improve your score. But, for most people, you need to do two things to improve your score: 1) pay your bills on time, and 2) pay down your outstanding debt.
- Hire a credit repair company: Alternatively, you can hire a company to guide you through the credit repair process. This can help if you have incorrect information on your credit report. And these companies typically don’t cost too much. For roughly $50 per month, you can hire a credit repair company.
Whichever route you choose, start now. The sooner you improve your credit, the sooner you’ll qualify for more loans and better rates.
Bad Credit Financing Option 1: Wholesale
Once you start the credit repair process, you’ll want to actually start investing. This comes back to the original topic of financing houses with bad credit. As stated, bad credit makes qualifying for loans extremely difficult. Furthermore, improving your credit requires money to pay down outstanding debt. (Although at Do Hard Money, bad credit doesn’t keep you from a loan—it just makes the loan a little more expensive. Typically speaking though, most hard money lenders require a minimum credit score.)
Enter real estate wholesaling. This investment strategy lets you make money regardless of your credit score. As a result, it represents a great approach for new real estate investors as they work on improving their credit.
With wholesaling, you don’t actually purchase an investment property. This means you have no need to apply and qualify for financing. Instead, wholesalers find off-market properties, and they enter contracts to purchase these properties. Rather than actually close on the purchases, they assign the contracts to a third party, typically a fix & flip investor. They assign these contracts for a fee. As such, wholesalers find deals, connect the sellers with investors, and collect a fee in the process—all without dealing with the headaches and credit requirements of qualifying for a mortgage.
If this strategy interests you, check out our Investor’s Edge software. Successful wholesaling depends on having a network of willing buyers to take contracts off your hands. This software includes a massive network of buyers located all over the country.
Bad Credit Financing Option 2: Bird Dog
Real estate bird dogging is similar to wholesaling. But, rather than actually put properties under contract, bird doggers only find these potential deals. Essentially, bird doggers find leads for wholesalers. Bad credit absolutely does not matter when you’re searching for these deals.
Wholesaling can certainly bring in plenty of money. But, success depends on an effective marketing strategy to actually find off-market potential. Wholesalers can significantly amplify their returns by recruiting a solid team of bird doggers. The more people you have out finding you deals, the more deals you’ll ultimately land.
For the people actually doing the bird dogging, view the work as a learning experience. If you spend some time bird dogging, you’ll begin learning the ins and outs of the wholesaling industry. Eventually, you’ll have the knowledge and experience to begin wholesaling on your own.
Bad Credit Financing Option 3: Hard Money Lenders
You can also flip houses with bad credit. Traditional lenders typically refuse to provide mortgages on properties that need major repairs. Additionally, these lenders have strict credit requirements for investment property loans. For both of these reasons, if you don’t have cash, you’ll need to use a hard money lender to finance fix & flip deals. These lenders base their loans on the property—not the borrower’s credit profile.
As long as you don’t have bankruptcies and judgements on your record, hard money lenders will work with you. If the deal itself makes sense, you can qualify for hard money financing. Successful flips generally result in far greater profits than a wholesale deal. Investors can use these larger returns to pay down other debts, further accelerating the credit repair process.
Final Thoughts on Financing a House with Bad Credit
Eventually, most real estate investors want to finance a rental property with a conventional mortgage. You’ll need a good credit score to do this.
Recognizing the central role credit plays in investing, look at the above as a tiered approach. Begin improving your credit score as soon as possible. Then, spend some time wholesaling and/or bird dogging to pay down outstanding debt. Next, you can start the fix & flip process, pulling in even greater returns to help repair bad credit. With your credit improved, you can begin financing houses with conventional mortgages.