How to Buy Rental Property With a Poor Credit Score

One of the reasons real estate is such a powerful and highly desired investment is because of how it allows you to highly leverage your assets with very cheap debt.

The problem is if you want to take on debt to buy investment property you will have to be familiar with the world of credit scores. If you have a high credit score you can buy a home with as little as 3% of total purchase price and sometimes even less.

But having a low credit score makes it much hard to get a mortgage to buy a home. Though it's still possible.

Getting a Mortgage With a Low Credit Score

Your options are limited if you don't have a strong credit score. Lenders see you as a riskier borrower and will only be able to offer you a more expensive interest rate if they can you offer you a loan at all.

Therefore the first step should always be to try and improve your credit score.

But also it helps to avoid credit mistakes in the first place.

FHA Loans

At the time of writing this, if your credit score is above 580 then you're in luck.

The FHA loan program allows you to get a mortgage that is backed by the Federal Housing Administration. If you stop making payments the FHA will pay back the lender, significantly reducing the lender's risk and allowing them to offer mortgages to individuals with lower credit.

There are some downsides to FHA loans, such as the requirement that you buy a primary residence and live there, but you can still use FHA loans for investment property.

Finding a Cosigner or Partner

If you don't meet the 580 credit score for an FHA loan or can't get a mortgage yourself for other reasons you can always team up with someone else.

When your credit score isn't enough you can often work with someone you know who has a good credit score, who can cosign the mortgage and be on the hook if you stop making payments.

Additionally, partnering on real estate deals comes with other benefits and opens up more opportunities.

Being able to split responsibilities means you can work on the parts of the business that you enjoy or are more skilled at. Freeing up your time to scale and grow a larger portfolio.

If you can't get an FHA loan or qualify for a mortgage yourself, partnering or finding a cosigner is the way to go.

Buying Real Estate Without a Mortgage

Believe it or not, you don't have to take out a mortgage to buy an investment property.

For example, if you've been making any offers recently you have probably noticed how many investors are paying cash.

In fact, in a competitive market where buyers are making all cash offers with no contingencies, an offer with a mortgage is certainly not as strong. Relying on a mortgage means something could come up that prevents your loan from making it through underwriting, ultimately preventing you from being able to secure the funds to close on the property.

As a result, the seller has to put the house back on the market and deal with weeks of time wasted because they didn't go with the cash offer.

And you have to go looking for another deal that hopefully doesn't get snatched up by another cash offer first.

Here are some of the best ways to fund real estate acquisitions if you can't make a cash offer and can't get a mortgage.

Hard Money Loans

Hard money lenders are professional lenders who lend money to individuals who aren't able to get a mortgage for a multitude of reasons.

These types of loans are very common among house flippers, who buy distressed properties that don't qualify for conventional mortgages because of their condition.

Hard money loans are typically based on the property being purchased as opposed to the financial credentials of the buyer, though they will still want to see your credit score and understand your financial picture.

Lenders will base the amount of the loan typically on the value of the property, or in a house flipper's case, a combination of how much the renovation is expected to cost and the ARV of the property (the after-repair value).

If you bring a hard money lender a good enough deal, they are more likely to lend on it regardless of your credit score.

A few things to keep in mind with hard money lenders... They typically charge very high interest rates, lots of points up front, and their terms usually range from 6 to 24 months. So it's a different ballgame working with hard money lenders compared to getting conventional mortgages.

That's why they will often look at how many properties you've bought or flipped recently so they can further adjust their price based on your experience and their risk lending to you.

Private Money

Private money is similar to hard money, with the biggest distinction being that private money usually comes from friends, family, and acquaintances as opposed to professional money lenders.

Because private money comes from people you typically know, there can be some additional flexibility in the terms of the loan. You can and should work directly with your private money lender to make sure you understand their goals and what they value the most in this transaction.

Do they need their capital back after a certain amount of time? Offer a balloon payment or shorter loan term.

Do they want monthly income for as long as possible? Consider an interest-only loan with fixed interest payments.

Are they investing from a retirement account? They can't access the money anyway, so no need to make money payments, offer a balloon payment at the end of the term.

As you can see there are a lot of levers to pull that allows you to customize the loan to best work for both you and the private money lender.

Commercial Loans

If you can't get a mortgage because of your credit score or even your debt-to-income, consider getting a commercial loan.

The difference between residential and commercial loans usually comes down to how a property qualifies for the loan.

A residential loan is underwritten based on the credit score and financial standing of the individual buying the property.

A commercial loan is underwritten based on the profitability of the property and the amount of income is should be able to generate relative to the loan payment.

This can make it a lot easier to buy a cashflowing investment property with a commercial loan if you don't have the credit or financial background to close with a residential loan.

Portfolio Loans

The last type of loan to consider is a portfolio loan.

It's a specific type of loan that differs from a traditional mortgage because the intent is not to bundle it up and sell it off later. Instead, a portfolio loan is typically held by the portfolio lender for the duration of the loan.

This can be a helpful alternative for both those who don't have the credit score to qualify for a mortgage and those who have reached their maximum amount of conventional mortgages. (You pretty much can't qualify for a conventional mortgage once you reach 10.)

Portfolio loans solve these problems because they don't have to adhere to the stricter requirements of loans that are sold to Fannie Mae and Freddie Mac.

Because of this, you can sometimes get a portfolio loan with a lower credit score or weaker financial standing.

However keep in mind, portfolio lenders tend to take on more risk and don't see the immediate profit that other lenders benefit from when they package and sell your mortgage off.

As a result portfolio loans are more expensive and typically come with a higher interest rate.

But that should absolutely not stop you from acquiring investment property and growing your real estate portfolio. If anything it should inspire you to know that regardless of your current financial standing you can buy rental property and there are always ways to get around and work through the obstacles you may run into.

Wrapping Up

Having a strong credit score will allow you to get the cheapest mortgages with the lowest interest rates.

But even with a lower credit score you can absolutely still purchase an investment property and start building your real estate empire.

Sometimes you will be told no and you will probably be rejected a ton, but if you are willing to be creative and look at different products and options, there is always a way to make the deal work.

One last tip I'll leave you with.

If you find that none of these methods are working out for you, do a little research on seller financing.

Seller financing is where the property owner acts as the lender and loan payments are made directly to them. This allows you to finance a property without having to meet any other requirements beyond the approval and willingness of a seller to pursue seller financing with you.

It's definitely a powerful strategy.

I hope this was able to give you some ideas on financing your next property, and good luck in your real estate journey!