How to invest in real estate if you have bad credit

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It seems like every time you turn on the TV there is a new home improvement show flipping houses and make banking a popular way to invest in real estate. Investing in real estate and making it profitable can be tempting. But if your credit score is below 601 – the number that the credit bureaus mark as the dividing line between “good” credit and “bad” credit – you might have a hard time finding financing.

So is investing in real estate out of the question for anyone in this group? Not necessarily.

Buying investment property vs buying your own home

No matter what you’ve seen on TV, buying real estate as an investor is much more complicated than doing it as an owner if you turn to a lender to help fund the deal.

“Those looking to finance the purchase of real estate as an investment, as opposed to a primary residence, can expect a higher interest rate and tighter lending criteria from lenders before getting a mortgage, ”explains Bruce elliot, President of the Orlando Regional Realtor® Association and Associate Broker with Regal RE Professionals in Orlando, Florida.

Lenders typically require more money and a better credit rating for a real estate investment loan than for a home ownership loan.

“They are also looking very carefully to make sure that buyers of investment homes are financially able to support the mortgage over a long period of time in the event the property doesn’t sell, and they even have formulas to calculate expected rental income shortages, ”says Elliott.

Can You Invest In Real Estate With Bad Credit?

Unless you have money set aside or a loan from a friend or relative to fund your investment, getting a loan will likely be difficult.

That said, there are other options to help you someday become a real estate investor, says Elliott.

  • Improve your credit score. Solve any collection-related issues uncovered by a credit check and pay off existing balances. And watch out for other investments: Now is not the time to finance additional purchases like a car or to open additional credit accounts of any kind.
  • Find a hard money lender. No, he’s not an alley deal-maker. Hard money lenders are individuals or groups who will invest money in real estate projects, and they are often more willing to make a deal with someone who has poor credit. Of course, there will be a few drawbacks: “Typically, these lenders will need 40% to 60% down payment to buy or close outright,” notes Elliott.
  • Avoid depositing money. It might sound like a pipe dream, but Elliott says it’s often the story behind those “house for sale” signs that say “cash only”. “The investor simply bought an option or received permission from an owner to try to sell the house,” he explains. “The investor makes money either through a consecutive close or through payment directly from the end buyer.”

If you’re looking to invest in real estate, bad credit can be a stumbling block, but it doesn’t have to derail the whole train.

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