Buying an investment property can be an excellent way to generate passive income and build long-term wealth. However, having bad credit can make it more challenging to get approved for a mortgage loan. In this article, we will explore key strategies that can help you buy an investment property even with less-than-perfect credit.
The most important thing is to thoroughly understand your current credit profile, including your credit scores and report. This will allow you to identify any issues that need fixing before applying for a loan. You should also research lenders that specialize in bad credit mortgages, and look into alternative financing options like private money loans or partnerships.
It’s also crucial to save up a sizable down payment, ideally 20% or more of the purchase price. This shows your commitment and can help compensate for the higher interest rates you’ll likely pay. Carefully evaluating potential investment properties, creating a budget, and consulting experienced real estate professionals are other key steps to ensure success.
With the right preparation and persistence, buying an investment property is very achievable even with bad credit. This article will provide specific recommendations on how to make it happen.
Thoroughly review your credit report and scores
The very first step is to obtain copies of your credit report from the three major credit bureaus – Equifax, Experian and TransUnion. Comb through the reports carefully and dispute any errors you find by filing disputes with the bureaus. This can help improve your scores. You should also monitor your scores regularly using a service like Credit Karma or MyFICO. Knowing your exact scores and what is dragging them down allows you to target any issues. If you have limited credit history, try taking out a credit builder loan to add positive payment history. Allow at least 3-6 months for score improvements before applying for a mortgage.
Seek out bad credit mortgage lenders
While getting a conventional mortgage with a FICO score below 620 is unlikely, there are a growing number of specialized lenders that work with bad credit borrowers. Many have minimum FICO requirements around 580, and some may be willing to go even lower with strong compensating factors. Be prepared to make a larger down payment, usually at least 10-20%. Research lenders like Churchill Mortgage, Carrington Mortgage Services, and LendSure that offer these types of loan programs. Focus on lenders that keep loans in their own portfolios instead of selling to Fannie Mae or Freddie Mac.
Explore alternative financing options
If your credit situation is more severely impaired, with scores below 500 for example, alternative financing may be your only option. Hard money loans are asset-based loans from private investors at higher interest rates. The property itself secures the loan. You can also partner with others by pooling resources to buy investment properties. Look for money partners willing to use their better credit to get financing. Creative seller financing like lease-to-own arrangements is another possibility. The point is there are ways to buy investment real estate without relying solely on your own credit.
Save for a sizable down payment of 20% or more
In addition to credit, lenders also look closely at your down payment amount. Ideally you should make down payment of at least 20% of the purchase price. This avoids paying for private mortgage insurance while also demonstrating your financial commitment. While some lenders may accept down payments as low as 3.5% from buyers with good credit, you will almost certainly need at least 10-20% as a minimum with bad credit. Save aggressively for your down payment by cutting expenses and budgeting.
Carefully evaluate potential investment properties
Not all real estate investments are created equal, so it’s important to carefully vet any property you are considering buying. Make sure you run the numbers to confirm the monthly rent will exceed your costs like mortgage, taxes, and maintenance. Also factor in vacancy rates and management expenses if hiring a property manager. Drive by the property and surrounding neighborhood to gauge safety and amenities. A skilled real estate agent who specializes in investment properties can help assess viability.
Buying an investment property with bad credit presents challenges but is certainly achievable. Following the key strategies above and leveraging alternative options can help you successfully invest in real estate even if your credit scores fall short of perfection. Do your homework, save for a sizable down payment, clean up your credit as much as possible, and partner with the right lenders and real estate professionals.