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What credit score do you need to get a loan for an investment property? Unfortunately, there's no easy answer to this question. Credit score requirements can vary dramatically between lenders and are based on several factors.
However, there are some general guidelines that real estate investors should be aware of. You need to consider the credit scoring requirements for the main types of investment property loans, find out what score your lender will see, and understand why it can be well worth the effort to improve your credit score before you apply. Here are some of the things you need to know.
A conforming mortgage is one that meets the standards of Fannie Mae or Freddie Mac. In most parts of the U.S., the conforming loan limit is $484,350 in 2019 for a single-unit property, and limits are higher for multi-unit properties and higher-cost areas.
Fannie Mae publishes an eligibility matrix with its minimum lending standards, which include down payment requirements, debt-to-income limits, and liquid reserves. Depending on the property type and your qualifications in these areas, the minimum credit score you need could be as low as 640 on a single-unit investment property. That's if you put 25% down, have six months' worth of liquid reserves, and a debt-to-income of 36% or less. Or, if your debt-to-income is closer to 45%, it could be as high as 700.
Of course, these are just Fannie Mae's minimum standards. Individual lenders can and do set their own requirements, so I'd plan to need slightly higher scores than the minimums. You can find the latest conforming loan standards in Fannie Mae's current eligibility matrix.
For jumbo loans, expect higher standards
A jumbo loan is a mortgage that exceeds the conforming loan limit. Because these loans are not eligible to be guaranteed by Fannie or Freddie, jumbo lenders tend to have higher credit scoring requirements than you'd need for a conforming loan.
The exact requirements can vary significantly from lender-to-lender, as well as according to your other income, debt, and asset-based qualifications. But I'd generally expect lenders to want to see credit scores well into the 700s on a jumbo investment property loan.
Asset-based lenders still consider credit scores
There are two main types of lenders you could use to get a long-term mortgage on an investment property. There are conventional lenders, which generally include banks and some popular mortgage companies like Quicken Loans.
Then, there are asset-based lenders. These are lenders that only originate investment property loans and don't take the borrower's personal debts, income, or employment situation into account. As the term "asset-based" implies, all these lenders really care about is whether the property will generate enough cash flow to justify the loan.
Although they don't consider most personal qualifications, asset-based lenders -- at least all of the ones I've ever dealt with -- do check the borrower's personal credit score. Most of these lenders tend to have relatively low minimum credit scores -- 650 or below in many cases. Just to name one example, asset-based lender LendingOne requires a minimum FICO® Score of 640 for a rental loan, but stresses that credit is only one of many factors it will consider when making a lending decision.
However, a higher credit score can get you better interest rates, origination fees, and down payment requirements. The exact cutoffs depend on the lender, but to give you another example, an asset-based lender I've done business with requires a 20% down payment if you have a credit score of 720 or higher. Below that, the minimum down payment jumps to 25%.
Since, unlike conventional lenders, asset-based lenders don't have standardized minimum requirements, credit score implications can vary dramatically. So, if you're pursuing an asset-based loan, it's a smart idea to find out what the lender is looking for, and how being in a certain credit "tier" affects your loan options.
What credit score will your lender use?
Virtually all lenders use the FICO credit score when making decisions, so you can be pretty sure that your mortgage lender will use it as well. The question is which FICO® Score will they see.
First, the lender will typically pull your FICO® Score from all three major credit bureaus (Equifax, Experian, and TransUnion). They'll use the middle score of the three to determine your APR. For example, if your three scores are 705, 708, and 730, the lender will use the 708 for qualification purposes.
Second, the FICO methodology has been updated several times. FICO® Score 9 is the latest version, but many lenders still use FICO® Score 8. And mortgage lenders tend to use even older versions. So, it may be worth paying for a credit monitoring service that shows you all of the FICO® Scores that a lender could potentially see. I've been a myFICO.com customer for over a decade and can see 28 different versions of my own FICO® Score through the platform, including the mortgage-specific scores.
Working on your credit could be a great way to boost your returns
As a final thought, there are several ways to boost your investment property's returns. For example, you can choose to make capital improvements to increase rental income or shop around for a property manager with a lower fee. And most notably, you can negotiate a lower purchase price for the property -- as the saying goes, you make your money in real estate when you buy, not when you sell.
However, there are two components to buying rental properties, the purchase price and your financing terms. And the latter is often overlooked, even though obtaining more favorable financing terms can be an extremely effective way to boost returns.
Consider this simplified example. Let's say that you're buying a triplex for $250,000 and that you're putting 20% down, so you'll need to borrow $200,000. As of this writing, a top-tier borrower with a FICO® Score above 760 can expect to pay roughly 60 basis points (0.60%) lower APR on a 30-year fixed-rate mortgage than someone with a 670, which is generally considered to be decent credit. This means that if a top-tier borrower got a loan with a 4.5% APR, our decent-credit borrower could expect about 5.1%.
Although this might not sound like much of a difference, it adds up. The lower-credit borrower would pay roughly $26,000 in additional interest over the life of the loan. On an investment that you're putting up $50,000 in out-of-pocket cash for, that's a big difference in your long-term returns.
Here's the point. If you have okay, but not great credit, one of the best things you can do as a real estate investor is to do some work to improve your credit score. Building great credit takes years, but you might be surprised at the impact that some credit-building strategies can have in a relatively short period of time.
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