Can You Get an Investment Property Loan with Bad Credit?
The short answer? Yes. But a better question is this: how do you get an investment property loan with bad credit?
Having bad credit is a lot more common than you might think. According to Credit.com, nearly a third of Americans have a credit score below 601, which is considered “poor” by most standards. It only makes sense that some of these people have figured out ways to get around the credit barrier and buy their first investment property.
Investing in property has a number of benefits over investing in stocks or bonds, including:
– More control over your investment
– Greater asset stability
– Lower risk
– Tax benefits
– Protection against inflation
No matter how you plan to make money in real estate, whether that’s buying and selling investment properties or renting them out, this guide can help you with the first step – purchasing the property.
We’ll explore a variety of options for investors with bad credit so that you can be on the road to building long-term wealth.
But First, Address Your Spending Habits
You came here for advice, not a lecture, but it’s important to pump the brakes and ask yourself two very important questions:
1. Why do you want to buy an investment property?
2. Why do you have bad credit right now?
If your answer to question #1 involves making a quick buck, you might want to reconsider.
Property is not a fast-growing investment.
You can’t expect to make a profit overnight. It’s also a significant investment of your time and resources – while you can keep your day job, real estate is not something you can simply dabble in on the weekends.
The answer to the second question is even more important. If you know that your low credit score is the result of poor budgeting, frequent late payments, or spending more than you earn, you need to examine these bad money habits before you even consider sinking your teeth into an investment property,
On the other hand, you can be completely debt-free, handle your money wisely, and still have bad credit. Common reasons for this include:
– Being a co-signer on a loan with someone who frequently missed payments
– Spending recklessly in your youth (derogatory credit can remain on your report for up to 10 years!)
– You have no credit history yet
If that sounds more like your situation and you have enough excess money on hand to invest, then keep reading to find out how you can get an investment property loan with bad credit.
7 Ways to Get an Investment Property Loan with Bad Credit
As you’ve probably guessed by now, a traditional bank loan is going to be tough to get without a good credit score – you’re going to have to get a little creative.
The right solution for you will depend on your unique situation. If you’re serious about becoming a real estate investor, here are 7 ways you can get your foot in the door.
1. Find a Private Money Lender
Private lenders are individuals who provide direct funding to borrowers. If they believe that they can get a return on their investment in you, they’ll be willing to overlook a few dings on your credit history.
A private lender is often a friend or family member, but you can also find them through private lender networks. Individual lenders will have different requirements, but overall it’s a much faster and simpler process than getting a loan through the bank.
2. Hard Money Loans
Another way to finance an investment property loan with bad credit is to apply for a hard money loan.
A hard money loan is a short-term lending solution that is based on the value of the property, not the borrower’s credit or income. Hard money loans tend to be more popular with house-flippers because lenders are looking to finance properties with a high ARV, or “after repair value”.
Hard money loan will come with higher rates and a much shorter payment period than a traditional bank loan, so if you’re after a long-term real estate investment, this probably isn’t the right financing option for you. But if your plan is to buy a distressed property, renovate it, and resell it in the span of a few months, a hard money loan could be exactly what you need.
You can learn more about hard money loans here.
3. Invest with a Partner
If you know someone with good credit who would be interested in real estate investment, consider partnering with them. You’ll have to split your profits with them, but at least you’ll be able to get your property endeavors off the ground. Partnering up also allows you to split management responsibilities, such as attracting new tenants and performing maintenance tasks.
4. Use a Home Equity Line of Credit
Like a hard money loan, a home equity line of credit is tied to a property, not your credit history. The key difference is that instead of being tied to the property you’re buying, a home equity line of credit is tied to your current primary residence. And unlike hard money loans, home equity loans are often used to finance long-term real estate investments.
The amount of funding you can get from this type of loan depends on how much equity you have in your home and your loan-to-value ratio (LTV). The amount of equity you have is equal to your home’s current market value minus what you owe in mortgage debt. The LTV is the percentage of equity you can use to fund your investment purchase.
For a home equity line of credit to make sense, the amount you earn from renting out the property needs to be greater than your monthly expenses, which include:
– Loan interest
– Principal and interest on the mortgage
– Property taxes
– Property maintenance
Need help figuring out if a home equity loan would work for you? Call 813-328-3632 to speak with a mortgage professional from Associates Home Loan.
5. Seller Financing
Also referred to as owner financing, seller financing is a method of investment property financing where the seller and buyer agree to an installment payment plan.
The exact terms of a seller financing agreement vary from case to case – some sellers may request monthly payments, others may only ask for quarterly payments. These terms are laid out in a promissory note, which acts as legal proof of the buyer’s promise to repay their debt.
Seller financing offers more flexible terms than a traditional bank loan, so you may be able to find a seller who’s willing to work with your current credit score if you can provide proof of income and a certain down payment amount.
And because you’re not working with a bank, you end up with lower closing costs and a much faster buying process, and the owner gets a better return on their money – it’s a win-win in most cases.
The only problem you might face is that it can be difficult to find someone willing to sell by owner financing. Look for homes that are FSBO (for sale by owner) and mention in their listing that they are open to seller financing. Even if it’s not mentioned in the listing, it doesn’t hurt to be proactive and reach out to suggest financing terms.
6. Save for a Large Down Payment
Simple in theory but difficult in practice, you could try to save for a larger down payment to offset your credit history. A larger down payment comes with additional long-term benefits, too, such as lower rates, a smaller loan amount, and lower mortgage insurance premiums.
7. Consider Real Estate Wholesaling
In real estate, a wholesaler acts as a middleman between home sellers and buyers. Wholesalers identify properties for sale below market value, acquire a contract from the seller, and then transfer that contract to a buyer or another real estate investor. The wholesaler earns money through a wholesaling fee attached to the transaction.
Because you’re not actually holding onto the property, there’s no cash investment involved. That means no down payment, no monthly mortgage fees, and no credit checks.
Sound too good to be true? Wholesaling isn’t a walk in the park. Creating a list of reliable buyers takes a good deal of research and effort. And unlike becoming a landlord and renting out a property, wholesaling is not a source of steady income – it’s all about short-term profit. Consider these pros and cons carefully before you jump into the world of wholesale investing.
Find a Qualified Lender Near You
With enough patience, practice, and plain luck, real estate investing can turn into a lucrative career. And while getting an investment property loan with bad credit isn’t always easy, it’s far from impossible.
Associates Home Loan of Florida makes it easy to connect with the best possible funding source for your situation. Whether it’s a private lender, hard money loan, or a home equity line of credit, we can help a solution. If you’re looking to break into the Florida real estate market, you can learn more about the bad credit loan options we offer here.