Thursday, February 26, 2015

Preparing Your Credit for a Future of Investing in Real Estate


This will be a 7 part blog post that highlights important aspects that residential real estate investors need to know to plan for growth.  Please subscribe to stay updated on each portion as they are released.   Click the link(s) below to find out more about each topic.

History of investing
Taxes and Tax Deductions
Management
Cash reserves

Fannie Mae Guidelines and portfolio loans

Why Is Having Good Credit Important?

Being on the wrong end of a credit score can interrupt your investment future and ultimately stop you from seeing your full potential as an investor.  Neglecting indiscretions of the past can disrupt your ability to receive loans and potentially take years to amend.  Waiving a bad credit rating can suggest that you are a risk to investors/lenders.  This risk can not only affect your ability to secure the type of funding you require but make borrowing funds considerably more expensive. 

Developing and Keeping Good Credit

When applying for credit a lender is going to look at a number of things, including your DTI.  They will take a strong look at your 3 digit credit score.  This score is determined by;

  •  Past defaults and accounts currently in collections
  •  Average age of your existing credit accounts.  
  •  Percentage of on time payments
  •  Number of accounts on your credit history
  •  Revolving credit utilization.
  •  Number of recent credit inquiries. 


Here are some tips on each one of these items that will help you make dramatic changes in your credit score. 

Past defaults and accounts currently in collections

If you have an account in collections, know that it will stay on your account history for 7 YEARS AFTER THE LAST ACTION IS TAKEN.   That wording is very important.  If you call up the creditor and pay the $125 old cell phone bill that you may or may not have racked up in college, it will show on your report for 7 years that you HAD an account in collections.  The proper way to take care of an account that is in collections to endure that it doesn't negatively affect your score is to call the creditor and let them know that you don’t recall the cell phone bill and request that they guarantee to you IN WRITING that if you pay this debt that may or may not be yours, they will remove all record of it completely from your credit report.  Only then, should you pay the debt. 

Average age of your existing accounts

This one is easy!   If you have a parent, spouse, or an aunt that is really good with credit you’re home free.  Ask a trusted individual to add you to one of their credit cards that they have had for 10+ years with no balance and perfect payment history.  That’s it!  That’s all you have to do.  Let them know that you don’t want to use the card, you just need to be added to the account, not as a signee but to the actual account.  This will mean giving up your social security number to the credit card company.  Let your trusted family member know that you don’t need to have a copy of the card, you can make your mailing address theirs or take whatever precautions that you need to in order to help them feel warm and fuzzy.  This will increase your average age of credit over all of your accounts and make your score shoot up. 
This will also help you with the following category. 

Percentage of on time payments

If your aunt or spouse had had that particular card for 10+ years and have perfect payment history on it, and let’s say that you have one or two 30 day late payments on your report, this could potentially push you into a different bracket of “percentage of on time payments” and raise your score. Whatever you do, avoid paying anything late.  Most credit agencies don't report a late payment until it is 30 or more days late.  However, don't hide from creditors.  If you know that you are going to be late on a payment, call them early as possible and let them know.  They might be able to work with you.   

Number of accounts on your credit history

A common misconception is that it's a bad thing to have a lot of cards so people tend to close cards that they don't use.  Before you close an account, find out how long you've had it.  If it's a card that you don't use because it charges 18% interest, pay it down to almost nothing and hold on to it so it will raise your average.  If you've owned the card for over 8 years, it's probably raising your average age so closing it would only hurt your score.   The more accounts you have had the better…but you have to balance that with the average age of your accounts.   Not much you can do about this one but luckily, this category doesn't weigh as heavy on your score as other categories.  This is a perfect reason why you shouldn't apply for every credit card that shows up in your mailbox.  This is also the reason that you should stay away from department store credit cards.  More chances than none, the extra 10% you save on the day you purchase that new $120 outfit will be outweighed on the extra percentage point that you are going to have to pay every month on your $120,000 investment property mortgage. 

Revolving credit utilization

Another easy one…figure out what your credit limit is on every credit card you own.   Keep the balance on that card between 1% and 25% of the total limit at all times.   Do balance transfers or whatever you have to do to make this happen.  This is the piece of the puzzle that I've found that most people are missing.  This can make a HUGE difference in your score.  Sometimes 50 points or more.  You never want to have it over 50% and it’s not helping you to have it at 0%.  You want to show creditors that you know how to use credit responsibly.  If you don't have enough money to pay your cards off or enough available credit to do a balance transfer and keep the balance of each card under 25%, then as a last resort, you can ask for an increase on your limit.  Most banks will do a hard inquiry on your report when doing this so only use this as a last resort.  

Number of recent credit inquiries 

You've probably heard the saying “Banks only want to people who don’t need the money.”  This is a very true statement.  If you apply for every credit card that comes in the mail, and apply for a car loan and mortgage and decide to finance that new bed with 0% interest for the "special one day only President’s Day sale", banks are going to look at that as a red flag.   For this category you have to know the difference between a soft and a hard inquiry on your credit report.  A soft inquiry happens when you check your own credit on apps or websites such as Credit Karma, myFICO or LexingtonLaw firm.  Those types of inquiries DO NOT NEGATIVELY affect your credit score.  However, anytime that you are applying for any type of loan, including credit cards, you are doing what’s called a hard inquiry.  A hard inquiry will negatively affect your credit, especially if you apply and do not get the loan/credit card because you get denied or just decide not to.  A hard inquiry will stay on your credit report for 2 years from the day that your credit is pulled by the potential creditor.  There is a way to get these taken off of your report.  Lexington Law Firm has pre-written letters that you can send out to creditors and credit boroughs that demand that they take those inquiries off of your report unless the creditor can prove it was you who made that inquiry.  Most creditors would rather take it off than spend time and resources with an investigation.

If you read nothing else, read this…

Bottom line, know your limit.  Just because you get approved for a certain amount, doesn’t mean that you have to use it all.  There are other factors to consider before applying and accepting a loan that can have a huge impact on your investing future.  Make sure EACH of your credit cards are at least 75% paid off at all times.  And utilize apps and websites like myFICO, Credit Karma and LexingtonLaw Firm and Mint.  They are more of a reference and a monitoring tool than a magical fix all elixir, but if you are proactive with any repair that needs to be done, these websites are great tools that I have used myself and highly recommend. 
Hopefully all of this information helped you understand what you need to do to get your credit score a little higher than it already is. If you have any questions, please leave them in the comments section below or email me at JD.Castillo@NewWestern.com or you can always call me at 214-650-5493.  If you need Investment property or a loan on your next investment deal, we have some of the lowest rates in the nation and I would love to work with you. 


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