Real Estate Investor Financing 101: FICO

[Robin Simon]

adopted from a twitter thread

One of the most important numbers to determine your

✅Eligibility

✅Rates

✅Terms

✅Points

on a loan for your investment property is your qualifying credit score (or FICO)

"FICO" itself stands for "Fair Isaac Corporation" but is commonly used just as a shorthand for "credit score," a measure of your creditworthiness (how reliable you are for paying back debt).

There are three main credit bureaus "Equifax, Experian, and TransUnion" and lenders typically use the median (the middle number) score to qualify you.

NOTE: not many people are aware, but the credit score your mortgage lender uses is different from your consumer score

This score is based on general credit but more weighted toward your credit history on mortgage-related debt.

The 5 main factors are:

✅Payment History

✅Amounts You Owe

✅Length of Your Credit History

✅New Credit You Apply For

✅Types of Credit You Use

https://myhome.freddiemac.com/blog/notable/20210831-factors-credit-score

Lenders will typically have different credit score "buckets" as a big factor in the interest rate you qualify for, typically something like "660-680," "681-700", "701-720" etc

It varies, but each difference in bucket can have a large effect on your rate, something like 10-25 bps

It may not be truly logical that FICO should have such a big effect on interest rates on mortgage loans on investment properties but that is the current reality!

Yes, someone with a $10M Net Worth and 680 will get a higher rate than $500k Net Worth and a 740...(doesn't really make sense but thats the reality

Additional Pro Tip - if you are borrowing through an LLC with a partner, lenders tend to differ between if they will use the lower or higher credit score of the partners. If you invest with a partner or partners, and one of you has much better credit than the other, it is likely smart and will save on rate if you go with a lender that will use the higher score