Only have 1 secure credit card, will i have trouble taking loans?

Question

Hi! First post ever! I am a new RE investor; I would appreciate your help.

I have had a Capital One secure credit card for many years now with a limit of $500 (I have try to convert it to a normal Credit Card but capital one doesn't do that). I have another Macy's credit card that i opened without thinking but will soon disappear since i only used it once and haven't use it in many months (for that reason, i don't usually count it). As of now, according to Credit Wise from Capital One page, my credit score is 720 and I owe $0 on both credit cards. Let's say I want to invest in a $500K home and will pay 20%, will I have trouble getting a loan and trying to do BRRRR in the home?

If yes, what would you recommend me do? Open 1 normal credit card (I know opening many credit cards at once will impact my credit score for a while) to increase my loan limit? Does the loan limit even matter in this case or just try to buy a much as i can with my secure credit card?

David M. · Answer

@Christian OlivoYou really need to talk to a good lender to give you real numbers. But, in short you are looking at this all wrong. Your credit score doesn’t solely decide how much money someone will lend you. It’s more so if at all (if you have a crappy score) or at what cost (betters scores get slightly lower rates).But, if you truly have a 720 score (there are many fico algorithms out there and many websites “sell” you on other fico scores but not the one used for mortgages) then you will qualify for most conforming loans.But, to figure out how much of a loan you can get you need to have a lender run the numbers. Some really rough rules of thumb would be 2.5x to 3x your gross income (assuming very little other debt). So, if you had a $100k salary, you could borrow $250k to $300k loan. This a very rough rule of thumb because you need to take into account the property taxes and insurance payments. In NJ where we have some of the highest property taxes in the US, it’s a big deal. Basically, the loan officer needs to be able to show the underwriter who is following govt guidelines/regs that you have the ability to make the mortgage payments. So if you add up the principal, interest, tax, insurance (PITI), can you reasonably make those monthly payments? Make any sense?

Christian Olivo · Answer

@David M. absolutely! this definitely help me undestand it! thanks!

Chase Whitney · Answer

sorry for the long delay! but to answer your question, there are a few different loan types you can utilize depending on what investment strategy you are using in your market. For example, if you served in the military you can use the VA loan and put no money down. you can utilize the 20k cash to pay for renovation and house hack, since the va loan can only be used to purchase homes you plan on living in. Another strategy you can use is purchase the property using a hard money lender. They will pay for 80% of the property and 100% of the renovation cost. Whats great about hard money lenders is that they dont care what the house condition is and there are far less red tape and hoops you have to jump through to close. Some will say that hard money loans would be considered a cash purchase which is a huge deal to sellers, because that means quick closing. The bad thing about hardmoney loans is that their monthly interest rate is high and their monthly payments are high, but thats because the loan generally amortizes in 12 months. You can use the 20k to pay for the holding cost. Hardmoney lenders are a great tool to use for the BRRRR strategy. Also they dont really care about your credit history. Another strategy you can use is to find a partner thats willing to put their own skin into the property. All you would have to do is manage the renovation and ensure that the budget isnt going to be blown out of the water and in return you give them 50% of the net profit after refinancing.

Christian Olivo · Answer

@Chase Whitney sorry for late response, i thought no one had responded...Still don't have much knowledge about which loan, so don't really know yet. Would like to just know if it's possible at all with my credit story that i particularly have or if i have to add another credit card. I will have 20K in some month.

Chase Whitney · Answer

what sort of loan did you have in mind? there are a ton of different amortizing loans. How much capital do you have in this scenario? when using the BRRRR method to invest you have to have money to pay holding costs.