Credit Report Analysis

In a word, the most important element in residential real estate investing is FICO. Without a sufficient FICO score, grand thoughts of becoming a real estate investor should be put on hold, but only temporarily, at least until your credit allows you to qualify for 90 to 100 percent LTV non-owner-occupied loans. On average, most lenders, prime or subprime, look for FICO scores in the 580+ range or higher.

The fundamentals of a successful real estate investment are based on an above-average credit profile. Unlike those ever-present late-night real estate infomercials that promise riches to anyone with a heartbeat and a valid credit card, the real world of buying a home, especially as an investor, requires a higher threshold. high level of due diligence on oneself to maintain a good credit profile. You do not need to have an A+ credit per se, just an above average credit. As a former mortgage operations consultant, I worked in almost every major city with other consultants, where our job was to re-underwrite, audit, and price loans, both prime and sub-prime, for client banks securitizing their mortgage portfolios for sale, typically to Wall Street investors. This experience familiarized me with the do’s and don’ts of applying for a loan. It also gave me insight into how lenders and banks think, and how they view the strengths and weaknesses of a buyer’s credit profile. Therefore, here are the following items to consider before becoming an active participant in the real estate investment field:

1. Go online and sign up for a membership to one of those credit monitoring services. The cost is approximately twenty-five to fifty dollars and it is well worth it. All three major repositories (TransUnion, Experian, and Equifax) have these services.

2. Know what’s on your credit report and immediately address those issues that will improve your score. Most online credit report providers offer a score simulator, which will provide hypothetical scenarios on how paying off some or all of certain debts can improve your score. Take advantage of this “crystal ball” credit management system as it will provide you with a roadmap to recovery that will better align you with your real estate investment aspirations.

3. Act diligently to remove these collection claims and judgments from your credit report. If the amounts are small, consider paying the balance in full, since a partial payment doesn’t help your FICO Score as much as if the claim had been paid in full. Although it hurts to do this, pay off a debt or collection that may not be rightfully yours, simply consider this the cost of doing business. Believe me, this will be a test of seeing the “big picture” instead of worrying about the little things and getting excited. Making tough decisions to help you in the long run is strategic thinking. Overcoming some of these credit failures, if you have any, is part of that initial process. But paying off this debt will improve your FICO score and result in better financing terms. In particular, the best financing conditions translate into greater access to capital, which means a higher LTV, which is better adapted to the real estate investment methodology, which dictates leverage as a fundamental cornerstone of a successful investment.

The last three points are just some of the credit-related issues to be aware of. Keep in mind that in the world of lenders, there are generally three types of loans. These are loans for owner-occupied homes, non-owner-occupied homes, and second homes. As an investor, you’ll qualify for non-owner-occupied loans, which have a slightly higher threshold in terms of qualifying. Remember, getting an owner-occupied loan with 100 percent financing is not a problem. An investor will be required to put more money into the deal at the higher threshold. Despite that, the new and improved underwriting criteria that the credit and Wall Street worlds enacted some ten years ago have opened the door to millions of people in this country who were previously unable to buy homes. Thousands of investors can now also purchase under current underwriting guidelines, relative to LTV requirements and minimum FICO scores. This is a significant advance, since fifteen or twenty years ago, the average investor who bought a house as an investment would have to pay between 15 and 20 percent.

So, do your research and get the best loan that offers you the highest leverage, which is a critical component of risk reduction. Also, know your credit profile, because if you don’t, the lender most likely will. Hopefully, they will see it as a favorable risk.