What credit score do you need to get a loan to buy investment property in the United States?

 

Mortgage approved and in accordance with the standards

An approved mortgage is a loan that meets the standards set by Fannie Mae or Freddie Mac. In most parts of the United States, this limit is $ 548,250 for single-family homes by 2021, and higher for multi-unit properties in more expensive neighborhoods.

Fannie Mae publishes mortgage eligibility specifications with its minimum mortgage standards, which include down payment requirements, debt-to-income ratio limits, and liquidity reserves required to obtain a mortgage. Depending on the type of property and the conditions of your acquisition, the minimum credit score you need can be at least 640 for a single-unit residential investment property. That means you have to pay at least 25 percent of the cost in cash, have 6 months of liquidity reserves, and owe 36% or less on your income. If the debt-to-income ratio is around 45%, even a score of 700 may be necessary.

Of course, these are just the standards of the Fannie Mae Institute. Lenders can set their own requirements individually, so you may need to score slightly above the minimum.

Expect higher standards for jumbo loans

A high-yield loan or jumbo loan is a type of mortgage whose amount is higher than the standard approved loan and complies with the standards. Since these loans are not guaranteed by Fannie Mae or Freddie Mac, they naturally have more stringent conditions. The exact requirements vary depending on the lender and the borrower's circumstances, but typically consider a minimum score of 700 to receive this type of loan.

Lenders also value credit scores based on their asset-based lenders.

There are two types of lenders you can use to get a long-term mortgage loan. Conventional lenders, which are mostly banks and lenders such as Quicken Loans, and asset-based lenders who only lend on real estate loans and do not care about your financial situation, and only care about the real estate investment. Generate sufficient cash flow.

Although most of these lenders do not take into account the borrower's personal circumstances, they will check your credit score. Many of these lenders do not want a lot of scores, for example, LendingOne wants to lend a property for rent Score 640, but it also pays attention to other features.

However, a higher credit score can give you better interest rates, lower costs and better down payment terms. The exact amount depends on the lender, but for example, an asset-based lender will require a down payment of at least 20% if it has a score above 720, and in cases where the loan applicant's score is low. Is more than 720, increasing this figure to 25%.

Unlike conventional lenders, asset-based lenders do not have specific criteria and may vary greatly from company to company, so if you are looking for this type of loan, gather more information about different lenders.

Which credit score will the lender check?

Almost all lenders use the FICO standard when making a decision, so you can be sure that your lender will use it as well. The question that arises in this case is which FICO credit score lenders consider.

First, the lender usually extracts your FICO credit score from three major institutions (Equifax, Experian, and TransUnion). Lenders use the median credit score of these three to determine your APR (annual percentage rate). For example, if your three scores are 705, 708, and 730, the lender will use a score of 708 to determine if you are eligible for a loan.

Second, the FICO method has been updated several times. The version called FICO® Score 10 is the latest version, but many lenders still use FICO® Score 8 or even older, so it may be better than the services that allow you to get all your FICO scores. See, use.

Improving your credit can be a great way to increase your income

There are several ways to increase the return on your investment. For example, you can increase the facilities of your property and get more rent or hire a manager with a lower salary. Most importantly, you can negotiate to buy the property at a lower price. That way, you get the benefits of buying the property, not selling it. However, there are two important components to buying a rental property: the purchase price and the financing terms. Financing terms are often overlooked, although it is a great way to increase revenue.

Consider this simple example. Suppose you buy a three-unit home for $ 250,000 with a 20% down payment. That means you have to borrow $ 200,000. At the time of writing, a high-level borrower with a FICO score above 760 can expect to receive approximately 60 basis points (60%) lower for a fixed-rate mortgage for 30 years. Pay APR (annual percentage rate) to someone who has 670 scores. Also, this means that a person with a score of 760 will receive a loan with a four and a half percent APR and a person with a score of 670 will receive a loan with an APR of five and a half percent. While this difference may not seem like a big deal, a borrower with a lower score will pay an additional $ 26,000 extra interest over the life of the loan.

So if you have a good score but can do it better, as a real estate investor, you should try to improve your score as much as possible. This may take years, but you will definitely see the positive effect in a short time.