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 hard money. When determining if a loan scenario is a right fit for the company, lenders will take a look at the borrower’s financial history, including the credit score.
When lenders check a borrower’s credit score, it’s mainly focusing on looking at the borrower’s ability to repay the loan. Typically, credit score minimum requirements depend on the exit strategy of the investment. For an investor who is flipping the property for a quick sale, the credit score may not be as big of a determining factor. This compared to an investor who will look to refinance out of a hard money loan using a traditional lender, the credit score will be a significant factor.
Before diving into the ways to improve your credit score, 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 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 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.
- 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.
- 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 credit 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, 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.
RCN reviews the individual’s financial history to determine if there is a repeating pattern of poor financial management or if an isolated incident affected the individual’s credit. We also look at the borrower’s credit in terms of the exit strategy. If the borrower intends to buy and hold rather than fix and flip the property, we will pay closer attention to the scores.
As a direct private lender, RCN Capital is here to help you fund your next fix and flip or fix and lease property. Our experienced loan officers and in-house underwriting help the process run smoothly and quickly.
For more information on how RCN can help you, visit RCNCapital.com