On today’s blog I would like to talk about the importance of a good credit rating or score when investing in Real Estate.
The importance of a good credit rating will have an impact on real estate investing portfolios. There are two terms, your credit score and your credit report and many people think they are the same thing, but they are not. The one you need to focus on is your credit score as this is the one that really matters as it is not only to buy real estate investments but for your own personal life. The higher your credit rating score the better it is for your financial wealth. There are some key real estate factors associated with your credit score which is issued here in Canada by Equifax or TransUnion. It is also called the FICO score in the United States. Your credit score is a reflection on your ability to pay your bills and repay debts and loans. Banks and Landlords use it to form an opinion on your financial health and to evaluate the risk of you defaulting on rent or loan repayments. It’s also a critical factor when applying for finance or a remortgage for a second property.
Let’s use two people with different credit scores as an example. Credit scores are normally rated between 300 to 900. Person A has a score of 700 and person B has a higher score of 780. Both apply for a $400K mortgage and are approved. You would think that is good news for both, but the terms of the loan are different due to the credit scores. Person B with the higher score secures a loan over five years at an interest rate of 2.9% while the lower score person is offered the same loan at 3.2% adding higher costs to their repayments and directly affecting profit margins. So that is one reason for you to have a good credit score.
Even if you are not a property owner, your credit score can affect your ability to rent a property as a tenant. Landlords regularly use credit scores to evaluate the financial health of potential tenants and their ability to pay their rent. We have discussed in previous blogs the importance of good tenants and all the problems bad ones can cause. The easiest way for a landlord to check your ability to pay and your credit history is to do a check on your credit score. If you have no credit score, this is similar to a low rating so it’s very important that you focus on establishing and maintaining your credit score.
If you are applying for a mortgage always check your credit score with the credit bureau or rating organization your lender is affiliated with. While this sounds logical you would be surprised how many people don’t check this. Always have your financial homework done when approaching any financial institution for a loan. Make it easy for them to approve your loan. I would also advise that you speak with a mortgage advisor or broker to help find the best deals on the market for your personal requirements as there are different processes and qualifying criteria for various type of loans and institutions.
Maintaining a good credit score is very important as mistakes can be made and these can stay on your credit score for years negatively affecting your financial wealth and restricting what you can achieve as a real estate investor. Check it at least once a year and request changes if you feel there is misinformation recorded with your score or it has not been updated properly. Keeping an eye on your credit card activity and ensuring your cards are below 50% utilization will help improve your score. Your credit score is freely available so be aware of it and take steps to maintain and improve it. As always I am available for advice or to answer any detailed questions you may have with regard to credit scores, so please don’t hesitate to contact me.
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