Buying investment property can be challenging with bad credit, but it is still possible with the right financing strategies and by taking steps to improve your credit. Having a credit score below 700 will limit traditional mortgage options, but alternative lenders provide higher interest loans for borrowers with scores as low as 500. Improving credit takes time, but simple steps like paying bills on time and lowering credit utilization can help boost your score within 12 months. Regardless of current score, investors should research property markets, create a business plan, and consult with lenders to understand all financing options.
Explore financing specifically for bad credit borrowers
While getting approved for a traditional mortgage requires good to excellent credit, specialized lenders offer products for borrowers with lower scores. Hard money loans are asset-based loans with higher interest rates, usually 12-15%, and require 20-30% down payments. Private lenders also offer mortgage products with higher rates but can approve borrowers with credit scores around 550-600. Government-backed FHA loans only require a 580 credit score. Shopping with multiple lender types can help investors find reasonable rates despite credit challenges.
Choose alternative property types with lower down payments
While many lenders require 20% or more down for investment properties, certain specialty properties offer lower down payment programs more feasible for borrowers with limited funds. FHA 203K rehab loans only need 3.5% down and fund both purchase and renovations for fix and flip properties. USDA rural development loans require no down payment at all for eligible rural properties. Or consider lower-priced markets and multi families with rental income where less cash is needed to reach 20%.
Take action to repair and build your credit history
Getting a bad credit investment property loan should come alongside an action plan for credit repair to improve financing options in the future. Simple steps like correcting errors on credit reports, keeping credit card balances low, avoiding new debt, and consistently paying all bills on time can boost scores by 50-100 points in 6 months to a year. After 2 years of responsible credit management, many alternative lenders will refinance at much better rates.
Connect with experienced real estate mentors and partners
Those new to real estate investing should learn from market veterans, as property management, repairs, and tenant relationships take experience and skill. A good real estate agent knowledgeable in investment financing can advise on local markets, appreciation potential, and the optimal loan products for each deal. An accountant can also explain tax deductions available to investment property owners. And consider finding a partner to co-invest if your personal credit or funds are limited.
Buying investment property is achievable even with current credit challenges by exploring specialized financing options requiring less-than-perfect credit. Simultaneously taking action to pay bills on time and lower balances will steadily improve your score to access better rates in the future. Mentorship from experienced investors is key to navigate the unique demands of managing rental property.