​Why Your Credit Score Matters in Real Estate

The recent security breach at Equifax has a lot of people, myself included, looking at their credit reports and scores more carefully. While now is a great time to review this information, it really is something we should all be doing at least once a year anyway. Why? Because credit scores can have a very big - and lasting - impact on you as an investor and the properties you pursue.

Here’s what you need to know about credit scores, and why they matter so much to real estate investors.

What is a credit score?

Your credit score is a 3-digit number that tells banks and other financial institutions about who you are as a borrower. Every loan or credit card you’ve taken out is included in your credit report, along with your payment history, amount borrowed, credit limit, and dates when accounts were opened and closed. This information allows lenders to gauge their risk level in lending to you, and loan terms are structured around this data.

What’s a good score?

A person’s credit is ranked as bad, fair, good, or excellent. Scores range from 300 to 850, and the higher your score is, the better off you’ll be when you need to borrow money. Here’s the breakdown of how scores are ranked:

• Bad credit - If your score is below 650, you are generally considered to have bad credit. This means that you’ll likely have a hard time qualifying for loans or credit cards, and if a lender does agree to loan you money, you’ll have to deal with higher interest rates and possibly other fees.
• Fair credit - You’re considered to have fair credit if you score between 651 and 700. The majority of Americans are in this category, with the national average right around 695. While people with scores in this range will be able to secure loans, they are still considered higher risk than those with good credit, and may pay more for their loan as a result.
• Good credit - Good credit is a score between 701 and 759. At this level, you’ll likely qualify for any loan you apply for (within reason, of course). While interest rates and other costs will still vary from lender to lender, you will likely pay far less for your loan than those with lower scores.
• Excellent credit - To have excellent credit, you must score higher than 760. Very few people fall into this category, and only a history with no credit “dings” will get you here. That means no late payments, no defaults, and a low debt ratio. If you can do this, you’ll get the lowest interest rates and ultimately pay the least amount of money for your loan.

What does it mean for investors?

For investors, this is all important information. Many rely on financing in order to obtain properties, and credit scores are one of the primary deciding factors when it comes to getting a mortgage. A lot of lenders were burned in 2008 after the housing bubble burst, because they had spent years dealing in subprime mortgages (i.e., lending to people with bad credit). Since then, lenders have tightened up their loan requirements, and it’s much more difficult and costly for people with lower credit scores to secure a mortgage.

Additionally, the lowest mortgage interest rates are only available to those with the highest credit scores. This means that the lower your score is, the higher your rate is and the more you’ll pay over the life of the mortgage. Even a difference in one percentage point can mean a savings of tens of thousands of dollars. For investors focused on their bottom line, it’s critical that they maintain good or excellent credit to maximize profit potential.

If you’re new to real estate investing, be sure to check your credit report with one of the three credit reporting agencies: Equifax, Experian, or TransUnion. You can access your full report for free once per year. Review it carefully, looking for any mistakes or inconsistencies, and take steps to correct them if you come across any. To improve your credit score, make sure all debts are paid on time each month, and work to lower your debt ratio by paying balances off. Remember, the higher your score, the more money you stand to make on your investments.