The status of your credit plays a major role in helping you to obtain commercial real estate financing. It helps to determine how much financing for which you will qualify and what kind of an interest rate you will get on the loan. Unfortunately, most people do not pay attention to or monitor their credit files on a regular basis. If you are going to invest in real estate, this is an absolute “must.â€
What is good credit?
Good credit for a commercial real estate investor usually means about twelve to fifteen “trade lines†of seasoned credit in a credit report, with several real estate loans either showing as active or having been paid off successfully. For example, car loans, current mortgages, and charge cards which are at least two years old and show no late payments. Again, for real estate investors, successful maintenance of real estate loans is a “must.â€
Now granted, not everyone is perfect (in fact, very few are!) and we all have our ups and downs, so don’t be worried if you have a few 30-day late payments or some old collection accounts on your credit report. Today, credit reporting systems use a complex method of evaluating credit patterns which is distilled into and issued as a “credit score.â€Â The higher the number, the less risk there is that a borrower is likely to “default†on a loan.
While this process, called “credit scoring,†is in full use for residential loans, the commercial lenders are only now starting to adopt it. There is a trend to use them by certain non-bank lenders for loans less than $2,000,000 or so.
Most underwriters (the people who would approve your loan) and underwriting systems that review your track record are looking for trends. In other words, they’re looking for a history or recent pattern of good or bad credit. Isolated incidents should not affect your ability to get a loan.
How Can You Repair Your Credit?
In most cases, a simple letter or phone call to the credit card company or business that originally gave you the “credit†can put you on the right track to having that “scar†removed from your report. It may not even be necessary though, based upon your recent credit patterns!
Sometimes they’ll require you to pay-off the balance of your debt or send in a letter explaining why you were late with your payment. Don’t pay any creditor off without talking to a qualified professional financial advisor or mortgage consultant first!
However, if you have a history of recent late payments, you’re probably going to have to let time take its course (although there might be trick or two here you can use).
There are a million scenarios I could review, but I think it’s important you walk-away with two key thoughts from this: 1) Your credit can make or break your ability to acquire a loan; and 2) you must know what is on your credit report, your credit score, and begin to examine and, if necessary, repair any credit problems immediately.
What Role Does Your Investment History Play?
Your investment property loan history or “track record†will play an important role in whether or not a lender will want to finance your next property. Investment properties, and their respective loans, are often looked upon as a higher credit risk than if you were buying your own home. So, if you have a proven track record of successfully selling or managing investment properties loans, with no late payments, then you are more likely to get your loan approved.
The bottom line is that “credit†or, more accurately, “credit history†is a major determinant in your ability to finance commercial real estate. Pay close attention to this area of your finances if you intend to be an active investor and manage your credit as you would one of your properties: Actively.
“The Investment Property Insider†is published by Craig S. Higdon, a veteran commercial mortgage broker. He publishes the weekly e-zine and blog, www.InvestmentPropertyInsider.com, for commercial real estate investors, developers, and industry professionals. Visit the blog and get this free report: “The 7 Biggest Loan Mistakes Real Estate Investors Make And How To Avoid Them.â€
One thing that many borrowers are not aware of – or are chosing to ignore – is the definite possibility of homes in your area experiencing a “leveling off” of home values. While over the past few years the equity seemed to grow at an unreasonable rate – without much effort on the part of the borrower, that same equity could essentially disappear just as quickly. In addition to leveling home values, most ARMs are scheduled to begin to reset as early as 2007, and many homeowners will find themselves with a much higher monthly mortgage payment. For those who have a large enough monthly income to compensate for the higher payments, the jump in interest rates may not have as severe of an effect. But most borrowers will experience payment shock – even without adding in the credit card debt, and have a hard time with the monthly payments.