With the development of economy, more and more people start to notice the huge value of real estate investment. However, bad credit records make it difficult for many investors to get loans for real estate investment. This article will analyze the key issues of real estate investment loans for people with bad credit and provide feasible suggestions.
First of all, real estate investment can generate considerable income through rental returns and property value appreciation. It is an ideal choice for both individual and institutional investors. However, the down payment of real estate property purchase usually requires a large amount of capital. Therefore, loans become the major source of funds for most real estate investors.
People with bad credit records like late payments, foreclosures and bankruptcies will face higher difficulties in getting approved for real estate investment loans from banks and conventional financial institutions. The reasons lie in the stricter audit standards and evaluation model of banks. But some alternative lending institutions may provide real estate investment loans for borrowers with bad credit. Investors need to fully understand their financing options and choose the most suitable loan products.
Several practical strategies can help investors with bad credit improve loan approval rates. Solid investment plans, reliable co-signers, adequate collateral and stable income sources are important factors that can show the repayment capability. In addition, improving credit scores in advance and prepaying for loan fees may also facilitate the application process.
Conventional banks have stricter requirements for borrowers’ credit records
For real estate investors with bad credit history, the biggest challenge is to get loans approved from conventional banks and financial institutions. Generally, conventional banks have rigorous standards for applicants’ credit scores and debt-to-income ratios. Late payment records, foreclosure history, high outstanding debts can easily lead to loan rejection.
According to research data, the average FICO credit score requirement of conventional banks for investment property loans is around 700. Applicants with scores lower than 620 are very unlikely to be approved. In addition, conventional banks often require loan-to-value ratios lower than 80% and debt-to-income ratios lower than 43%. The strict thresholds make real estate investment loans inaccessible for people with bad credit records.
Alternative lending institutions provide more flexible loan products
While conventional banks tighten their requirements, some alternative lending institutions like private lenders and hard money lenders offer more flexible real estate investment loan programs for borrowers with bad credit.
Private lenders often focus more on the viability of investment projects rather than borrowers’ credit scores. If a project can generate considerable cash flow, private lenders may still provide loans despite the bad credit records of investors. Hard money lenders also offer asset-based loans with higher interest rates, lower loan-to-value ratios and shorter terms. The quick lending process makes them suitable for flipping projects.
The relatively loose requirements of private lenders and hard money lenders make them the major financing sources for real estate investors with bad credit. But the borrowers need to be aware of the higher interest rates and costs associated with these alternative loan products.
Improve credit history in advance to increase approval odds
Since credit records play an important role in real estate investment loan application, improving credit scores well in advance can largely facilitate the approval process for borrowers with bad credit history.
They can check credit reports and try to correct any incorrect information. Making timely payments, paying down existing debts and avoiding unnecessary credit inquiries in the past 6-12 months can help increase credit scores before applying for real estate investment loans. They can also provide records of on-time rental payments to demonstrate their repayment capability.
In addition, borrowers can consider applying for credit-building loans or secured credit cards first to establish new positive credit records. Starting with small loan amounts may also be a feasible approach.
Offer stable income sources and adequate collateral
Apart from credit records, stable income sources and sufficient collateral are another two key factors that lenders evaluate. For applicants with bad credit, providing proof of adequate disposable income every month from business, salary or other sources can assure lenders of repayment capability.
Sufficient collateral is also important. Borrowers can use property, deposit accounts or other valuable assets as collateral to lower lenders’ risk exposure. Having a co-signer with good credit is also an effective approach, especially when applying for loans from private lenders. The co-signers need to fully understand the repayment obligations before signing the loan contract.
In general, people with bad credit records can resort to alternative lending institutions for real estate investment loans, and improve their credit scores in advance to increase approval odds. Presenting stable income sources, reliable co-signers and adequate collateral can also help demonstrate repayment capability and secure the financing.