Borrowing the Money
If you do not have the cash from either your own funds or the collective funds of a partnership, it's time to find the money by borrowing it. You might be surprised how easily you can borrow hundreds of thousands of dollars to purchase real estate.
The reason it is so easy to borrow the money is simple: The loan is secured by the real estate. The real estate has value. If you don't pay the loan, the lender will foreclose on you!
Your Personal Credit Rating
The better your personal credit rating, the easier it will be for you to borrow money. If you have lousy credit, don't expect it to be easy to borrow. It's that simple.
Three major credit bureaus report what is in their files about your past credit history. The three major credit bureaus are:
• Equifax |
1-888-766-0008 |
|
• Experian (formerly TRW) |
1-888-397-3742 |
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• TransUnion LLC |
1-800-888-4213 |
Past performance of your credit allows an underwriter to evaluate and determine how you will likely perform in the future. The credit bureaus provide a score based on the information in their files. These credit scores are commonly called
FICO scores have other names. The three major credit bureaus providing the scores use different names for their numerical score:
These scores are used by most real-estate lenders to determine your overall credit worthiness. Each credit score is based on the information the credit bureau receives from lenders and maintains in their computerized files about you. As this credit information changes, your credit FICO scores change as well.
Most lenders use a combination of the three scores (one from each credit bureau) to determine your credit rating (some lenders use the middle score, others use the top two).
Obviously it is to your advantage as a real-estate investor to maintain as high of a credit score as possible. The better your credit score is, the better interest rates and loan programs you will be offered by real-estate lenders.
Credit scores range between 300 and 850. The actual ratings and what they mean are:
Excellent: over 750
Very Good: 720 or more
Acceptable: 660 to 720
Uncertain: 620 to 660
Risky: less than 620
As an active real-estate investor, your goal is to achieve and maintain a credit score of 720 or better.
Free Credit Reports
Each person is now entitled to receive one free credit report each year from each of the three major credit bureaus. Each of the three credit bureaus has policies of how to request copies of your credit report. You must request your credit report in one of these three ways:
Call 877-322-8228.
Visit
www.annualcreditreport.com Complete the form on the back of the Annual Credit Report Request brochure, available from the Federal Trade Commission (online or by writing), and mail it to:
Annual Credit Report Request Service P.O. Box 105281 Atlanta, GA, 30348-5281
Keep in mind that you have the right to contest any faulty information contained on your credit report. According to federal law, each of the bureaus must investigate and verify the information or remove it. If you find an error on your credit report, contact each credit bureau. Even the smallest error could seriously hurt your credit score and would likely cost you more money for a loan. Do not be denied the purchase of your real-estate investment property because of inaccurate information on your credit report. Take the time necessary to maintain a close watch over what is included in your credit report.
Repairing Problem Credit
Even if you have questionable or difficult credit, it does not mean that you can't improve it. It does take time, but it is quite possible to change your credit from negative to positive. According to the Fair Isaac Company, there are many things you can do to improve your FICO score. They suggest:
Always pay your bills on time and as you have agreed to do.
Stay current with your accounts. If you have missed any payments, get current.
Maintain low or no balances on your credit cards and other revolving credit. High outstanding debt will lower your credit score.
Don't open unnecessary credit cards or accounts.
Always attempt to manage your credit accounts responsibly. Protecting your credit score will always help you as a real-estate investor.
You should also begin work on your credit report immediately. It does not matter if you plan to acquire your first investment property in the next week or six months from now. It is never too early for you to begin monitoring and improving your credit scores.
Lines of Credit
One good source of funds for the working real-estate investor is an open line of credit. This is a preapproved loan, one that you can use for any purpose you choose.
When you use your equity in your primary residence, the loan is often called a HELOC (home equity line of credit). You might also consider refinancing your residence and taking the cash out to use for your investment property acquisitions.
Some savvy foreclosure investors use their credit cards as a readily available source of funds. Using credit cards that include a cash advance, these investors always have the money they need to make purchase offers or for down payments.
Borrowing from the REO Lender
As you learned in Chapter 16, the REO lender is often a source of financing when buying the foreclosure property. This is particularly true if the REO department outright owns the property.
When the REO department owns the property, that lender is usually the best place to look for financing. Through negotiation it might be possible to get more favorable terms than what is normally offered through regular loan programs.
The REO department may be able to arrange a quick loan for you. It is often possible to close on an REO property within days rather than the normal time of weeks or months.
