In this moment of low supply and high demand, obtaining a loan for businesses, automobiles, and homes is nearly impossible without a pristine credit report. We’ll get into why, but know this: if credit scores are important for the Average Joe, they’re doubly important for the real estate investor.
An excellent credit score gives investors credibility, negotiating power, and the lowest interest rates possible; and when you’re trying to build a portfolio or refinance, the interest rates you can score make a big difference on your bottom line.
The State of Mortgage Interest Rates
Interest rates have been on a long downward trajectory. 2020 brought us multiple record-breaking lows. As of the end of April 2021, we’re looking at a long streak of mortgage rates below 3%.
- 30-year fixed mortgage rates: 2.875%
- 20-year fixed mortgage rates: 2.625%
- 15-year fixed mortgage rates: 2.125%
- 10-year fixed mortgage rates: 2.000%
Of course, these all-time low rates come with a few caveats — namely, a required credit score of at least 740. Most of us are familiar with how credit scores are categorized, but let’s have a refresher for the sake of clarity.
Experian lays out the credit score scale this way:
- 300 - 579 — Very Poor
- 580 - 669 — Fair
- 670 - 739 — Good
- 740 - 799 — Very Good
- 800 - 850 — Exceptional
If you want to obtain the lowest mortgage rates on the market, then, you need at least a standing in the “very good” category. For real estate investors, falling into “exceptional” is particularly beneficial as you negotiate multiple mortgages to acquire investment properties.
But what’s the difference between a percent or two? So what if you can’t get the very lowest rates? It’s cheaper to borrow than it has ever been.
Why Minimizing Your Mortgage Rate Matters
Mortgage rates were a massive incentive in the frenzy of 2020’s real estate market. Unfortunately, rising home prices have dampened the low-mortgage-rate enthusiasm. Exponentially increasing property prices means that the average homebuyer is more likely to stretch their debt-to-income ratio, regardless of the interest rate they lock in. Not only that, but it is harder to save for an adequate down payment on more expensive properties.
We may have “been fine” in the 80s when we saw mortgage interest rates as high as 16%, but homes were also significantly more affordable, even adjusting for inflation.
Minimizing your mortgage rate by even points of a percent makes a difference when the amount you need to borrow keeps going up. Lending standards, too, are tighter than ever. After all, with rates so low, financial institutions want to guarantee they’ll get a return on their investment. Only the most promising credentials will do.
So how do you improve your standing in the eyes of lenders?
Steps to Improve Your Credit Score
Prioritize What You Pay Down
Debt utilization is one of the factors that determine your credit score. This is the ratio between your card balance and your available lines of credit. This is why it can be beneficial to use more than one credit card. Rather than having a 20% utilization on one card, you can have a 10% spread on two cards. If one card has higher utilization than others, focus on paying it down first. This will help your credit score.
Spread Out Payments
Ideally, you pay off your credit cards in full each month. The lower your credit utilization, the better. However, we recognize that times can be tough financially. That’s been clear in the past year more than ever. But when a big purchase is necessary, you might not always have the cash on hand to make it happen.
Try to time your payments. Pay twice a month to knock out that balance rather than all at once at the end. Do your best to avoid adding big bills on top of a credit balance, though. Interest can cause your debt to get out of control.
Keep Up with Your Credit
These days, just about every major business uses its own credit card. Getting “preapproved” for these cards happens often. While a mix of credit helps — as do the lines of credit you have — don’t fall into the trap of accepting every credit card that pre-approves you.
Here’s an example. I’m sure plenty of us have taken advantage of Amazon’s deal. You apply for their credit card in order to get a major discount on your order. While having that Amazon credit card isn’t necessarily a bad thing, it is bad when Amazon makes it your default payment method... without asking or notifying you.
If you’re assuming you’re paying with debit and you don’t look at statements closely, you’ll likely find out that you have a balance on that card you “never use” when the late payment is due.
Be mindful and strategic of how you utilize credit, particularly online. Review all of your statements — even on cards you don’t use — as you never know if your information has been used in a way you didn’t intend!
Rely on your REI Nation advisor to help you find the right lending to build your best real estate investment portfolio!