Being able to borrow the amount of money it takes to buy property can be life-changing for those on the receiving end. But for lenders, lending money represents a risk—and your credit is one factor they use to determine your personal level of risk as a borrower.
Does that mean that you can’t invest in real estate with bad credit? Not exactly.
Although a low credit score may not help you in your search for financing, it doesn’t necessarily mean all doors are closed. Every day, smart investors find ways to secure investment property loans that bad credit can pose barriers to. All it takes is a few bright strategies and knowledge of the options available to you. Whether you’re getting a part time second home or investment property, we’ll discuss your options.
Is It Hard to Get An Investment Property With Bad Credit?
Real estate investing with poor credit can be a hurdle when it comes to purchasing an investment property. The reasons for this are no surprise: for mortgage lenders, your credit rating is a prime indicator of your lendability.
As a record of all of your debt, your credit history is used to gauge the likelihood that you will be able to pay down your mortgage, make timely payments, and ensure that the lender receives a return on their own investment.
But before we jump into how your credit score affects your chances of getting an investment property loan, let’s talk about what credit is and what qualifies as bad credit.
Over 90% of lenders in the United States will look to the Fair Isaac Corporation (FICO) for your credit score.1 When assessing your credit score, FICO takes five key areas into consideration:2
- Your payment history
- Your total debt
- The types of credit you’ve used
- The length of your credit history
- The number of new accounts you hold
Taken together, these factors ostensibly give lenders an idea of your credit risk, as indicated by your score. Scores range from 300 to 850 points.3 Anything below 580 is considered bad credit, while anything between 580 and 630 is considered poor credit. Both classifications could complicate your loan search—but they might not make it impossible.
Investment Property Loans, Bad Credit, and You
When it comes to investment property loans, bad credit can be a detriment. But you shouldn’t let that completely deter you. There are certain limitations you’ll face, obstacles you’ll need to overcome, and perhaps a few sacrifices you’ll have to make. But even with a low credit score, all hope is not lost.
That said, taking out a conventional loan with bad credit may be tricky. The lower your score, the less likely lenders are to trust in your ability to pay back the loan. If your credit score is particularly low, they may not approve you for a loan at all.
If they do agree to lend to you, that approval may come with some steep interest rates. This may not be the best option for people with poor credit, as high interest rates can lead to:4
- Larger monthly payments
- A higher risk of default
However, keep in mind that your credit score isn’t the only factor that lenders consider when reviewing a mortgage application. Your annual income is also an important number and can affect your lendability as well as your down payment amount and interest rate.
6 Investment Property Loan Options for Bad Credit
If you’ve been trying to apply for an investment property loan, but your bad credit is holding you back, fear not. Here are six alternatives to conventional loans that may be just what you need. Learn how to buy an investment property with bad credit using one of these options.
#1 Apply for a Hard Money Loan
A conventional mortgage loan is the way many property buyers choose to go. But if you have less than fantastic credit, you may have to investigate other options, like a hard money loan.
Hard money loans are loans that private individuals or groups of lenders lend for investment properties.5 Because they aren’t affiliated with large lending companies, hard money lenders may be more likely to overlook your credit score in favor of other factors.
One principal factor that makes hard money lenders such a valuable resource for people with poor credit is that they’re more concerned with the value of the property in question than your personal financial history. In most cases, the property is put up as collateral.
Hard money loans can also be beneficial because they often offer:
- An easy application process
- A quick turn-around time
- Motivated lenders
#2 Seek Out a Portfolio Loan
Sometimes, your poor credit may be the result of hard times or isolated mistakes and not consistently bad financial decisions. If this is true for you, you may be able to take out a portfolio loan to pay for an investment property.
The process of taking out a portfolio loan doesn’t differ very much from taking out a conventional mortgage. You’ll apply with a bank or another lender who will review your records and determine whether or not you’re a suitable candidate. They will also take your credit score into consideration. However, portfolios tend to have less stringent credit requirements than traditional home lenders.6
Poor credit aside, portfolio loans can be a smart decision if you:
- Are self-employed
- Are a repeat real estate investor
- Need a more flexible loan solution
#3 Look for a Partner
If you’re looking for an investment property loan, bad credit doesn’t have to stand in your way. One solution that many people turn to is applying for financing with one or more partners.2
When you buy an investment property with a partner, you’ll both have a stake in the property and the profits it derives. That said, if your credit is poor, you may need to offer something more to convince a partner that the investment is worth their while. That could mean:
- Providing more capital upfront
- Being willing to handle property maintenance
- Making property repairs
#4 Find a Private Lender
Many people are able to maneuver around their bad credit by turning to a private lender for an investment property loan.2 Essentially, a private lender is anyone with the funds to lend you the money you need. They could be:
- A relative
- A friend
- A business or other associate
Generally, private loans come with a pretty informal process. Instead of working with a bank, it’s up to you and your lender to determine lending terms and a repayment plan that works for you both. That said, it’s usually a smart idea to bring in a lawyer to draw up the paperwork. Private loans are a great option for learning how to flip houses with no money and bad credit.
#5 Talk to the Seller About Financing
Depending on the property, you may be able to talk to the seller about financing the sale directly.5 This is another way you can avoid traditional avenues and skip those investment property loans which bad credit can make so elusive.
When the property seller finances the sale, you’ll treat them like the bank. You’ll work out loan terms like interest rates, monthly payments, and loan duration. When the loan term begins, you’ll make payments directly to the seller.
This type of financing can be a huge benefit for a real estate investor with poor credit, as it can offer:
- Low qualifying bars
- Low closing costs
- Financial flexibility
#6 Try House Hacking
If you’re thinking that house hacking involves outfitting your home with a gaggle of new tech gadgets, think again. The phrase actually refers to a fairly popular method for avoiding oppressive mortgages—and all the hurdles you have to jump through to obtain one when your credit isn’t spectacular.
There are several ways to pull off house hacking.7 One method involves purchasing a multi-family property like an apartment building. Then, in addition to renting out the other units, you can take up residence in the building as well. That way, the property is technically a rental property, meaning you may be eligible for:
- Lower down payments
- Low credit loans
- HomeReady rental property loans
However, house hacking definitely has its drawbacks. For example, as the property owner, you’ll be put in the position of being a landlord. This means dealing with tenants and being responsible for maintenance and repairs, among other responsibilities.
But playing landlord might be worth it when you consider that your tenants will be paying a significant portion—if not all—of your monthly mortgage payment.
There are many ways to invest in real estate, even if you have bad credit. Finding an investment partner, securing a personal loan from a friend or family member, or house hacking are all possible options. But there’s also a way you can free up some extra cash by using the house you already own: a sale-leaseback program.
With a sale-leaseback program, you can sell a house while living in it and convert your home equity to cash you can use to pay off debt, plan for retirement, or invest in that property you’ve had your eye on—and you never have to move out. Many sale-leaseback programs have no hard limits on credit scores or income types and personalized plans to fit your needs, making them an option worth considering if you struggle with less than perfect credit.
- My FICO. What is a Credit Score? https://www.myfico.com/credit-education/credit-scores#
- Investopedia. What Is a FICO Score? https://www.investopedia.com/terms/f/ficoscore.asp
- Nerd Wallet. What Is a Good Credit Score? How Do I Get a Good Credit Score? nerdwallet.com/article/finance/what-is-a-good-credit-score
- Credit Karma. You can find a home loan with bad credit — but should you take it? https://www.creditkarma.com/home-loans/i/bad-credit-home-loan
- Wealth Fit. 10 Ways to Invest in Real Estate With No Money & Bad Credit. https://wealthfit.com/articles/invest-real-estate-bad-credit/
- Bankrate. Portfolio mortgages: What they are and how they work. https://www.bankrate.com/mortgages/portfolio-loan/#
- Spark Rental. How to Get an Investment Property Loan with Bad Credit. https://sparkrental.com/investment-property-loan-with-bad-credit/