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We all know that investing in real estate is a great option to secure our future financially. With numerous residential projects being offered at affordable prices, it is no surprise that you would be tempted to own a new house. However, if you haven’t maintained a good credit history, you may be wondering how to deal with it. Your credit score comes into the picture if you are planning to avail of a home loan to buy a new property. If you are not sure what a bad credit score means then we will give you a brief.
A credit score is a number that represents a person’s creditworthiness or ability to repay the loan amount. Banks or lending firms check your credit score to decide your loan eligibility. It is a three-digit number that falls in the range of 300 – 900. It is calculated based on your previous credit payment history. If you have a credit score which is above 650, your chances of getting a loan sanctioned will be more.
If you are someone who did not manage to get a high credit score, don’t lose your hope. A bad credit score doesn’t necessarily stop you from investing in real estate. Keep your worries aside and read on to know how you can still consider buying a property with a bad credit score.
6 ways to get around bad credit to invest in property
Forming a real estate partnership with a trusted person is a good way of investing in real estate. If you can find an investment partner with a good credit score, then you can use their credit benefits to purchase a property. In this case, the financial burden can be shared between you and your partner. Also, the profits will be shared by the partners as agreed. While getting into a real estate partnership, make sure that you prepare a contract document reviewed and signed by both parties to avoid conflicts. A real estate partnership will allow you to make larger investments which can bring more returns in the future.
If your credit score is not satisfactory to get a loan sanctioned, then try to find a co-signer with a good credit score. It can be a relative or a close friend who is willing to act as a guarantor of your loan. Before availing the loan, make sure that you have the capability to pay the monthly loan EMIs. Failing to pay the loan installments will not only put you at risk but will also affect your co-signer. If you are paying the EMIs regularly without delays, then you can see that your credit score is improving gradually.
If you are not eligible to buy a brand new home, then fret not you can always start by investing in a distressed property available at cheap rates. You may be eligible to get a lower loan amount to afford an old house that needs repair. After buying this home, you can get it renovated and flipped for a profit. This investment strategy is called fix and flip and it gives you a chance to get good returns in a short period. Although this method involves more labor as compared to buying a new property, this option has less capital investment, making it easier for people with low credit scores. Make sure that you choose a property with a good location advantage.
If you find it difficult to get a home loan sanctioned from a bank due to a low credit score, you can also try hard money loans. A hard money loan is a short-term loan funded by private investors (individuals or businesses) which is secured by real estate property. The term hard money loans are usually 12 months but it can be extended for up to 2 or 5 years. The interest rates for these loans are higher as compared to conventional home loans from banks or financial institutions. However, a hard money loan is ideal for a fix and flip investment strategy. Getting a hard money loan with a bad credit score is not an issue as these lenders don’t follow strict regulations and policies based on credit score.
Real estate wholesaling is another method to invest in real estate with a bad credit score. Real estate wholesaling involves a wholesaler contracting a property with a seller and then finding a suitable buyer who can purchase it for a higher price. The difference in price will be taken as a profit. Wholesaling is one of the best short-term investment methods followed by real estate investors. It is also a great option for beginners to get a breakthrough in real estate investments as it does not demand a big amount of capital to start with. Real estate wholesalers generally find and contract distressed properties. Wholesaling requires great marketing skills to ensure profits. In some regions, you may also need a real estate license to practice wholesaling.
If you have saved a significant amount of money to be used as a down payment, you can try to secure a loan on this basis. That is, if you are capable of paying 20% of the loan amount or higher in advance, then you may be eligible to avail of a home loan despite having a low credit score. Larger down payment may qualify you for availing the desired loan amount as it represents the good financial stability of the borrower. Although this method can be time-consuming as it involves saving a huge amount of money, you will still have the satisfaction of buying property based on your credit.
For those who are dreaming to invest in property but unable to start with it, you have the option of investing with REITs (Real Estate Investment Trusts). A REIT is a company that pools capital from numerous investors to invest at a commercial level. So rather than buying a property of your own, you can pool your money with other investors through a REIT. A Real Estate Investment Trust leases property and collects the rent to distribute it as dividends to shareholders. This method can help you earn profit to gradually increase wealth and improve your credit score. REITs facilitate you to earn money without having to buy or manage the properties on your own.
While we hope that these tips will help you to start investing in real estate, we recommend you to work on bettering your credit score to make profitable investments in the future. Having a higher credit score will make you eligible for a higher loan amount at reduced interest rates. So start paying your EMIs and credit card bills on time and wait for the results.
Read on to know How Credit Score Impacts Home Buying Process.
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