Q: How do I obtain investment property loans with bad credit? I rent out one property that I own, but I can’t get a loan on it because my credit score is 560.
A: When people get turned down for a bank loan, the natural tendency is to think that the bank is wrong – and isn’t giving your application proper consideration. Realize, however, that bankers specialize in making loans for profit. In the current economic climate, they’re doing everything in their power to limit losses, especially by being picky about to whom they lend money.
A low credit score is a big red flag for a mortgage lender, particularly when the borrower isn’t seeking money for his or her principal residence, but for an investment property. Bankers know that owners of investment properties tend to have higher mortgage default rates than do owner-occupants.
That’s logical, when you think about it. After all, if times get tough and something has to be sacrificed, the average real estate investor will sacrifice his rental property by paying the mortgage on it late, or not at all. However, that same real estate investor will try his very best to pay his own mortgage on time, in order to keep a roof over his head.
What to Do if You Don’t Get Approved
So what should you do if one or more banks say “No” to your loan application, or they approve you for such a paltry loan amount that you can’t possibly afford to buy other homes/investment property in your area? In my opinion, if you get a flat-out “No” from a bank, you should take that as a serious sign that you are not ready to acquire additional real estate because of one or more shortcomings.
Don’t take a “No” personally and don’t feel like the bank is forever rejecting you. Look at a “No” as if they bank is saying: “No – not today.” That doesn’t mean you can’t come back later – in six to 12 months – with a much stronger application. If you are turned down, take the opportunity to ask the bank directly what deficiencies you have as a potential borrower and work at correcting them.
Once you find out what areas you need to shore up, and take steps to do that, you’ll substantially increase your odds of getting approved down the road. In the vast majority of cases, you should be able to get approved in one year or less, if you do what is necessary to strengthen your mortgage application.
Take Time To Improve That Credit Rating
Let’s say the bank told you “No” because you have bad credit. Now you know that you need to pay off delinquent bills, reduce debt to boost your FICO score, fix any lingering errors on your credit report, or possibly negotiate with your creditors to have negative information deleted from your credit file.
I also suggest you seek help from a reputable, free, or low-cost credit counselor. “If you get denied because of your credit, first go to a credit counseling agency, because sometimes in three to six months they can help you fix any credit problems you have,” says Bob Schultz, president of New Home Specialist Inc. in Boca Raton, Florida. Schultz started selling new homes in South Florida in 1968, and has been in the business for nearly 40 years.
He now works with builders and realtors, and has been recognized by Builder Magazine as one of the “50 Most Influential People in Home Building.”
“Get your credit back on track, and while doing that, start disciplining yourself to save more money toward a down payment,” Schultz advises. “Six months later, when your credit is improved and you have more money in the bank, that looks good to the bank.”
Consider a Strong Co-Signer … But Know the Pitfalls
Take heart in knowing that by waiting just a short time to fix any problems in your loan application, you’ll actually wind up saving yourself many thousands of dollars. That’s because even if you did get approved for a mortgage with a weak application, you’d be forced to pay a higher interest rate and probably additionally fees just to get the loan.
If you absolutely dread the thought of waiting six months or more, here’s another possible strategy that Schultz recommends: “Get a strong co-signer: Mom or Dad, or someone who trusts you enough so that they’re willing to make the payments if you can’t.”
Should you take this route, be absolutely certain that you can make your mortgage. If you don’t, you’ll jeopardize your own credit standing, and your co-signer’s – something that could ruin a relationship for life.