Your credit can literally make or break your livelihood as a real estate investor.
It means the difference between 70% LTV and 85% LTV, between 5% interest and 9% interest.
Deni & Brian review how you can boost your credit as a real estate investor, and how to use leverage to finance your properties once you do!
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Deni Supplee: Well, hi, everybody, and welcome.
Deni Supplee: We’re a few minutes late because of good old technology. Last week we talked about unsecured business credit lines and I know quite a few of you were attending the webinar on the Concierge Credit Service. So you probably learned quite a lot. Today we’re keeping someone in line with that subject. And we’re going to talk about 5 ways to build credit, which is important, especially when you want to invest in real estate. So without further ado, and because we’re a few minutes late, let’s jump right in. Brian, tell us a little bit about FICO scores.
Brian Davis: Sure. So there are a few different types of credit score out there, but the most commonly used as FICO, which is created by the Fair Isaac Corporation, that’s the term FICO. And these are used by most of the lenders out there and credit card companies. Credit scores range from 300 to 850. In practice, you almost never see credit scores below 500. And it’s rare to see credit scores above 800 as well. So a credit score in the mid to upper 600 is, you know, averaged a good Anything below 650 is fair, below 600 is bad, and then above 750 is great credit. Over 800 is outstanding credit. So that gives you a sense of the credit. So the way that FICO calculates these scores, here’s how it breaks down. So your payment history accounts for the largest proportion of your credit score. So if you make your payments late every month or forever, for that matter, you’re going to have bad credit. I mean, that’s what it is. If you make your payments on time every month, that goes a long way in helping you to establish better credit. So your payment history accounts for 53% of your credit score. Now, the next largest factor that impacts your credit score is the total amount of debt that you have versus your total credit limit. And this is particularly impactful for rotating credit lines like credit cards.
Deni Supplee: So and that’s per credit card.
Brian Davis: Yeah. So it’s basically the ratio of credit that you have, like the total credit limit you have versus the amount theocracy you use, and it’s calculated as a percentage. So if you have a credit limit of $1.000,00 on a credit card and you use 250, you have a credit balance of $250,00 a month. And that’s a 25%usage ratio, which is OK. Anything under a 30% usage ratio is pretty good. So you really that’s a magic number with the credit bureaus is 30% credit usage. You want to keep your balances below that. The next largest factor that impacts your credit scores is the length of credit history. The average age of your accounts accounts for 15% of your credit score. The older your accounts, the better. Older accounts mean that you have a more established credit history, whereas if you just opened an account last month, you don’t have a whole lot of credit history to speak of. So the average age of your accounts plays a role in your credit. Older is better.
Deni Supplee: And what I’m going to ask credit inquiries. What can I know this question comes up a lot, so I’m going to have you answer it “soft hits and hard hits“ can you describe the difference between them?
Brian Davis: Sure. So credit inquiries make up 10% of your credit score. And those first of all, they disappear after a certain amount of time. They disappear entirely within two years. They stop impacting your credit score within 1 year. So, you know, it’s just a tiny ding against your score. We’re not talking about much of a movement here on your score. But to answer your question, there’s been a hard inquiry and a soft inquiry is that a soft inquiry is initiated by the consumer and does not affect your credit score at all. So, for example, the tenant screening reports that landlords run through our website, those actually get approved and authorized by the tenant, by the applicant. So those are soft credit inquiries and do not hurt the tenant score at all. A credit card company or a mortgage lender, for example, runs your credit report unilaterally. That is a hard credit thing and that does hurt your score a very little bit. But again, it’s temporary and it goes away within a year. So it’s not not the end of the world, but it can hurt your credit score a little bit. And then finally, the last factor that impacts your credit score is your credit mix. So the different types of credit that you have, the credit bureaus like to see a diverse range of credit types. So credit cards and maybe a car loan or a personal loan or a mortgage loan. So the more different types of credit you have, the better. Although that being said, you also don’t want to have high balances on any of those. You know, because what we talked about for the second factor, your credit utilization ratio.
Deni Supplee: Right, and say you had a divorce or an illness or whatnot and your score is a little low or layoff or whatnot or covid.
Deni Supplee: What are some things that you can do to pop that score up a bit?
Brian Davis: Well, first and foremost, you want to check your credit score, your credit report regularly and your credit score, for that matter, because the credit bureaus get it wrong all the time. I mean, they’re processing billions upon billions of transactions every single day and they’re going to make mistakes sometimes. So you want to look for errors on your credit report. And if you see any errors that are hurting your credit, dispute them. And by law, the 3 credit bureaus, the main credit bureaus, Experian, Equifax and TransUnion, have to reply to you within 30 days. There’s a whole streamlined process that they have to honor by federal law. So they have very simple, user friendly ways for you to dispute any errors. Each one of their websites have a place for you to do that. So you want to monitor your credit report at least once a year and look for errors and then dispute those errors. And that is actually the fastest way to improve your credit score is to fix errors on it. Now, if your credit is bad because of things that you did and that because of errors, that’s a different story. The first and foremost thing that you must do is you must pay your bills on time in full every single month. No exceptions. If you make payments, it’s going to ruin your credit, period. That’s that’s just what it is.
Deni Supplee: Now, with that being said, there are attorneys and companies or whatever that will help you to clear up some of those things. And you’ll have, like Lexington laws, one of them. But there’s a bazillion out there and there’s attorneys that can actually because unfortunately, these credit companies sell. Your accounts of four dollars, pennies on the dollar and these companies will come after you with a fervor and there are regulations they have to follow and often they don’t. So it’s not a bad idea, even if it was your fault to check with an attorney or a company like Lexington just to see if there are things that you can do. And with their help, because I’ve heard it and I’ve seen it myself, I went through a divorce and I had help from an attorney, helped me to to stop some harassment and whatnot.
Brian Davis: Absolutely. Absolutely.
Brian Davis: And the next thing that you can do, the next fastest way to improve your credit is to pay down your credit card balances below 30% of your credit limit.
Brian Davis: So, again, if you have a credit limit on your credit card of $1.000, get that balance below $300,00. So get your balances below 30% of your total credit line limit and that will boost your score instantly or at least the next within a month. There’s a month-long delay here, but that is a that’s the fastest way other than fixing errors, paying down your credit card balances or other rotating debt balances, the fastest way to improve your credit score. Now, another thing that you can do along similar lines there is you can ask for a credit line increase, which can achieve the same results. Right. So if your credit line is $1.000,00 and if you have a $500,00 balance and if you get your credit card company to boost your bet, your credit card limit up to $2.000,00, then suddenly that puts you below that 30% utilization ratio. Right. So asking for a credit line increase can achieve the same result of getting your balance below 30% of your total credit line, just getting or asking for an increase.
Deni Supplee: Does that is a hard hit or a soft hit or does that affect your credit score at all?
Brian Davis: If they run your credit report, which they probably will, then yes, that will be a hard credit inquiry, most likely. But again, those are temporary and they’re very small. You know, they might ding your score a couple of points or something, but it’s not going to, it’s not going to make or break your credit score.
Deni Supplee: Got ya
Brian Davis: Now, finally, some people have not established much credit yet, which is different from trying to fix bad credit. Some people just haven’t had the chance to build any credit at all yet.
Brian Davis: College students, for example, young people, immigrants, you know, people who just haven’t had a chance to create a credit history yet. And the strategy for them is a little bit different. They want to open some credit accounts to start establishing credit. And one thing they can do is open a credit card account. Of course, that’s easy enough. Or if they have trouble opening a credit card because they don’t have any credit history, they can open a secured credit card where the credit card company holds collateral from you. Usually cash, though, the amount of cash that they hold as collateral. And then they’ll give you a credit card with a balance limit up to the amount of cash that you gave them. And it works so that they are still reported as a credit card. You know, it’s not a debit card. They just hold that cash reserve in case you default. And then after you have that for you, you can graduate up to an unsecured credit card, like a big kid. So another thing that you can do to build credit is you can get a credit builder loan, which is, you know, it’s not actually a loan. It’s a misnomer, but it’s reported as a loan to the credit bureaus. So what you do is one of these companies, you go to them and you agree to make monthly payments to them for a certain term, one year or two years, whatever, and they set aside your money for you.
Brian Davis: And at the end of the loan term, they give you back your money minus a fee for their bank, for their trouble. Right. But they report your monthly payments as if it’s a loan, as if it’s an installment loan.
Deni Supplee: So it helps with the mixed bags. So you don’t just have credit cards. So you also have a loan.
Brian Davis: Exactly. Exactly. So, you know, it doesn’t cost you much. You might pay $20 or something total for the for this service. And then over the course of the next year or two, you you build credit it and you get the money back at the end. So it’s a great way to build your credit profile if you do not have any credit history established yet. And one final point here is let’s talk mortgages against rental properties, because we’re all real estate investors here, right? Managers. So. 1 or 2 mortgages on your credit report helped your credit 3, 4, 5, 6, 7, 8, 9, 10. That is not going to help your credit at all. It’s going to hurt your credit. And most conventional mortgage lenders, they put a limit on the number of mortgages reporting on your credit before they stop lending you mortgages. So for most lenders, most conventional mortgage lenders, that’s for so you can have up to 4 conventional mortgages, mortgage loans, reporting on your credit and then you can’t take them out anymore. You have to go use someone like a portfolio loan portfolio lender who keeps their loans in-house and doesn’t report these loans to the credit bureaus. But you do there is a limit to how many conventional mortgage loans you can get on rental property. And so you get cut off by your traditional mortgage brokers and lenders.
Deni Supplee: Very cool, and we have a link to our loans page and there’s a ton of information on these types of lenders.
Brian Davis: Yeah, we’ve compiled a bunch of different portfolio lenders that specifically work with real estate investors that do not report your loan payments to the credit bureaus. It’s all held in-house. So by great resources. And we also have an article with much greater detail on how to improve your credit score, particularly as a real estate investor, since it does impact your livelihood. I mean, the better your credit, the easier time you’re going to have financing your rental properties.
Deni Supplee: Absolutely. I think people know that. I appreciate it. Oh, thank you, Kat. I’ve heard this. Oh, we have plenty of cash. We only need a small mortgage. So we’ll be OK even if we have bad credit, which isn’t always the case. So really protect your credit.
Brian Davis: You never know when an emergency will hit and when you’ll need access to more capital, and at that point, having good credit can be a lifesaver for you.
Brian Davis: So Tim says ”all 3 of my properties will be under my LLC very soon.” Tim, glad to hear that I can help with asset protection and in some cases with tax protection. But yeah. So Tim, if you not most conventional mortgage lenders will not lend to LLC portfolio, mortgage lenders will lend to LLC just for reference. So. All right, Danny, is there anything else you want to cover before we call this episode complete?
Deni Supplee: I don’t think so, Brian. You were pretty accurate
Brian Davis: And Christina says” even for using hard money lenders, you need an OK credit score”. And that’s very true. Yeah, even hard money lenders, the portfolio lenders and other types of real estate investor lenders, they do look at your credit score. Now, granted, they tend to scrutinize the deal on the property a little bit more closely and they tend to be a little bit more lenient on your credit. But they still set minimum credit requirements and they still price their loans accordingly. So keep that in mind as well. They will charge more for borrowers with bad credit.
Deni Supplee: I mean, there are loans, especially if your first time in your house hacking may be getting a duplex. So you could work with conventional and FHA loans that will work with you with a lower credit score. You know, if you still can get in, it won’t be a barrier.
Brian Davis: Yeah. And Tim asks, ”does that help with getting a new home loan? ”And I’m not entirely sure, which I’m not sure what you’re referring to here, but having just one mortgage on your credit is definitely better for going out and getting a new home loan like a second home or buying a replacement home rather than having like 4 mortgages or reporting on your credit, if that’s what you’re referring to. And of course, a higher credit score always makes it easier and cheaper to get a loan and with a lower down payment. So, guys, thanks as always. And we will see you next Tuesday at 2:00 Eastern, 11:00 a.m. Pacific. And one last comment from Tom doing ” so is putting all three properties in on my LLC. We’re getting a home loan”. No, not necessarily that will not putting your properties under unless your name will not necessarily impact your ability to get personal home loans. So, yeah, I wouldn’t expect that to to really impact your ability to get a mortgage for your own personal residence. But you know, something to talk to your lenders about as you’re as you’re pricing out loans, so.
Brian Davis: All right. As always, thanks for joining us. And we will see you next Tuesday.
Deni Supplee: Have a great day.