There’s no shortage of creative financing options available to investors, but one of the most popular methods to finance a real estate investment property is with the use of private or hard money lending. These lenders will look at experience level, financial history, and credit scores when determining if a loan scenario is a right fit for the company.
When lenders check a borrower’s credit score, usually with a hard tri-merge pull, it’s mainly focusing on the borrower’s ability to repay the loan based on their past financial history. Typically, credit score minimum requirements depend on the exit strategy of the real estate investment. For an investor who is fixing up the property for resale, the credit score may not be as big of a determining factor for LTV’s and interest rates. This compared to an investor who’s exit strategy is to refinance out of the hard money loan using a traditional lender, the credit score will be a significant factor in the loan approval process.
Generally speaking, Private Lenders are looking for a credit score above 600 but will consider credit scores around 575 and above depending on the reason for the scores level. So, before diving into the ways to improve your credit score to obtain the best LTV and interest rates, it’s important to understand how your credit score is determined. Credit scores operate on a scale range of 300 to 850, where 850 is the highest credit score that can be achieved. To achieve any score, credit is comprised of five elements, with some holding more weight (shown as the percentage below) than others;
Payment History (35%)
Amounts Owed (30%)
Length of Credit History (15%)
New Credit (10%)
Types of Credit Accounts (10%)
With the five elements that determine a credit score in mind, here are four simple ways to help increase your credit score;
- Check the Credit Report and Score
This may sound obvious, but it’s surprising how many people don’t actually know what their credit score is. In particular, when checking your score, it’s important to make sure there are no late payments incorrectly listed, and that the amounts owed (if any) for each of your accounts are correct. If you see any errors on the reports, dispute them immediately.
Before pulling a hard check on your credit that will affect the overall score, Bridge Loan Network offers soft credit pulls. Soft credit pulls have no effect on the credit score and will give the lender a general understanding of the credit score and if this is a scenario that makes sense for their company and the LTV and interest rates they can offer.
When the lender determines the borrower and the deal are secure, the hard tri-merge credit pull will still need to be on file, but if you are in the Bridge Loan Network portal, this score will last 90 days, and will not have to be pulled for every loan scenario you send to the lenders.
- Dispute Any Errors
Under the Fair Credit Reporting Act, both the organization that provided your credit report and the credit bureau are responsible for amending incorrect information on your credit report. It’s important to reach out to both parties with the information you believe is incorrect and clearly identify each item you are disputing, explain the facts around the error, and request it be deleted or a correction is issued. Also, in most states, you may be eligible to receive a free credit report from the credit bureau, once a dispute has been recorded, to verify your corrected information is listed.
- Pay Bills on Time
Payment history makes up 35% of your credit score. Late payments, even if they are only a couple days late, can have a major negative impact on the credit score. Setting up payment reminders with your card provider or adding reminders on your phone can help ensure no payments are missed. Most credit card companies have account settings to send alerts via text messages, emails or phone calls when a payment is coming due. You can also set-up your account to pay your balance every month, even if it’s just the minimum due, so you’ll never miss a payment again.
- Under-use the Card
Amounts owed is another major contributor, making up 30% of credit scores. It’s important to keep credit balances below 30% of the max limit of the account. Using even less will only help the score more. Some studies show that using your card at a 10% utilization ratio will have the most impact on raising the credit score.
Overall, private and hard money lenders may run credit checks to look for a borrower’s ability to repay the loan and credit score requirements can depend on the exit strategy of the investment itself. It’s important to know where you stand and how certain spending behaviors can affect your score.
Both soft and hard credit pulls are offered to all of our brokers on the Bridge Loan Network software. If you currently have these feature and are unaware of how to use them please reach out to our team for training. If you are interested in adding either of these features to your software, please again, reach out to a member of our team.
Submit a free inquiry and the opportunity will be matched with our qualified and approved hard money lenders. The simple application portal digitalizes the lending process enabling brokers and borrowers to upload needed documents, authorize credit checks and have a full loan package for our lenders to review. Apply now!