Many real estate investors, in particular when first starting out in investing, choose to finance their investment property. Accordingly, to maximize the return, one objective is to reduce the expense of financing. And how can you reduce the expense of financing the purchase of an investment property? Simple, you become a low risk borrower by improving your credit score. In other words, the higher your credit score, the less risky of a borrower you are, and the lower the rate you’ll find.
Therefore, before financing an investment property, make sure that not only your credit score meets the qualifying loan program requirements, but it also brings forth a low enough interest rate that allots for a positive cash flow. That said, if your credit score currently isn’t at par, no worries. You can raise your credit score with a few adjustments.
First, to improve your credit score, you must understand what variables are factored into your credit scores.
What factors are considered when calculating your credit score?
- 35% is based on payment history;
- 30% is based on amount owed;
- 15% is based on length of credit history;
- 10% is based on the types of credit used; and
- 10% is based on new credit.
Second, here are…
3 Ways to Raise Your Credit Score
- Improve your Payment History – To begin improving your payment history, start by paying your open accounts current. For instance, if you are behind on your car loan or active credit card, try paying it down to current and/or a zero balance. One note however, if you do pay it off, still keep the account open as that’ll be more beneficial to your FICO score compared to closing the account.
- Reduce your Debt Balance to Available Credit Line Ratio – In other words, add up the revolving debts displayed on your credit report (i.e. credit cards). Then add up your allotted limits (total credit lines) for these accounts. Finally divide your total debt by the sum of your credit limits. What’s your answer? Change this decimal into a percentage. If it’s below 30%, then you’re all good. However, if it’s more, you can increase your credit score by improving the subject ratio via: (1) Paying down some of your balances to reduce your debt; or (2) Calling your creditors and asking if they’re willing to increase your credit limit. In terms of the latter, make sure you stay responsible and not
- Address Credit Report Errors – Look at your credit report and see if there are any errors. If you find any, such as accounts you’re not familiar with, items you’ve paid off yet show open balances, and/or duplicate dings; you need to file a dispute online and include any documentation supporting your claim. Usually, once a credit bureau receives this info, they’ll contact the original creditor and give them approximately 30 days to respond. If the debt can’t be verified, it’ll be removed.
Finally, have you ever wondered how long dings last on your credit? Sometimes, particularly if it’s an old account, it’s best to leave and old account untouched and just let time take its course.
How long do negative dings stay on your credit?
- Credit Inquiries) 25 Months
- Chapter 13 Bankruptcy) 7 Years
- Chapter 7 Bankruptcy) 10 Years
- Civil Judgments) 7 Years
- Collections) 7 Years
- Late Payments) 7 Years
- Tax Liens – Paid) 7 Years
- Tax Liens – Unpaid) 10 Years
- Closed Accounts) 10 Years
There you have it, as you can see, you can personally improve your credit score on your own without the expense of any third party service, and see results pretty quickly. Expanding on this idea of improving your financial situation in order to invest smartly in real estate, next I’m going to address increasing your extra funds to pay down debt and put it aside as reserves.