Learn To Think Like A Lender

      For real estate investors, credit is one of the most valuable assets. Personal credit will determine the kind of financing an investor can secure, which will in turn determine the type of projects that investor can do. For such an important piece of the investment puzzle, there is a remarkable scarcity of information on how credit actually works. In order to become a better borrower, it can be helpful to understand things from a lender’s perspective.

What is Credit, and Why Do We Care About It?

     Credit is a reflection of how likely a borrower is to repay debt. Credit is like a muscle, the more it is used, the stronger is grows. A lender wants to see that a borrower has taken on different kinds of debt and has shown an ability to repay.

What Credit Score Will Get Loan Approval?

     A credit score gets you DECLINED, not APPROVED. A certain credit score may get a loan application into a lender’s approval process, but there is no such thing as automatic approval. Each lender has a different appetite for different kinds of debt, and when a borrower comes asking for a loan, that lender will look at the potential borrower’s credit. If the credit is weak, the lender will reject the application. If the credit is strong, then the lender begins reviewing all the other elements of the project that may or may not fit their particular requirements.

What is the Difference Between a Credit Score and a Credit Report?

     A credit report is like a math test, and a credit score is like the grade on the math test. The numerical score summarizes the information in the test. When a lender runs a borrower’s credit, that is the point when a credit report is generated. Then that particular credit report is given a score. This is a key point that many borrowers do not understand. A credit report exists ONLY when a lender runs your credit, and then that particular report receives a credit score.

     A strong credit report gets a borrower through the door into the lender’s approval process, but each lender has their own approval process and there is no way to guarantee anything. A borrower can increase the likelihood of approval by learning to think like a lender. What is a lender trying to avoid, at all costs? RISK!

     Real estate investors tend to be positive people who look for the potential and the possibilities in a problem. Lenders, on the other hand, see the world in terms of risk. They are always thinking; what’s the worst that could happen? This difference in perspective can cause a great deal of frustration for the investor. Learning to see the other perspective can yield more productive results.