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How Important is a Good Credit Score For Real Estate Investors?

educational article real estate investing credit scores mini-perm loans Article 2 min read

Your credit score can have a lasting impact on your ability to invest and get a mortgage.

Not only can it change a loan from being approved to being denied, but it can affect other aspects like interest and insurance rates, among others. You’ll want to make sure your credit score is good enough to allow you to take advantage of the real estate market. So, how important is your credit score when you’re looking to buy real estate?

A low credit score will impact the cost of your loan because it represents the level of risk to a mortgage lender.

A high score indicates that you pay your bills on time and will be able to repay your mortgage; a low score, on the other hand, means that you could be a potential risk to a lender. To compensate for the extra risk, lenders will increase your interest rates to protect themselves. Therefore, the higher your credit score, the lower your interest rates. But what should your ideal score be?

The short answer is that, ideally, your credit score should be above 740 and your total debt payments, including your future mortgage payments, should not exceed 43% of your gross income. The primary benefit of a higher credit score is that you’ll pay less interest. Forbes illustrates that the difference between a 3.5% and a 4.5% interest rate on a 30-year $250,000 mortgage is over $50,000 in interest.

The importance of a good credit score is illustrated by other benefits, like better credit card terms, higher credit limits, and lower insurance premiums.

Another important factor for home buyers is homeowners insurance. The insurance premiums you pay once you purchase a home will be greatly affected by your credit score. Unlike your regular credit score, your credit-based insurance score isn’t publicly available. To evaluate your risk factor, insurers use your credit report for many of the same things as traditional lenders. FICO estimates that 85% of home insurers throughout the United States use insurance scores to determine monthly premiums in states that allow it. The reason for this is that the Federal Trade Commission determined that these scores accurately predict risk, or the likelihood of filing a claim, to underwriters. What, then, can you do to improve your credit score?

Your credit score calculation is a bit complex. Some of the factors considered are your loan repayment history, the total balances on your accounts, how long those accounts have been operating, and the number of times you’ve applied for credit in the past 12 months. The best way to keep a high credit score high is to pay your bills on time, every time. Additionally, you’ll need to pay your existing debts, like credit card balances and other loans, and avoid opening new accounts, credit cards, or loans.

Content written for RE Mentor

By C. Mendoza

Article real estate