Real estate investing is a great way to develop a fairly consistent revenue stream. Unfortunately, if you have bad credit, it can be very difficult to get started. The median home price in the United States is close to $180,000. Unless you live in an area where property values are well below the median, you will need to come with at least that much to purchase just one investment property outright.
Since one property does not a sound investment make, having bad credit means that you will either need to clean up your credit before you start investing, or try to find creative ways to get the funding you need.
Cleaning up Your Credit
Depending on just how bad your credit is, it could take a year or longer to clean up your credit enough that you can qualify for a loan for an investment property. Part of the reason is that lenders tend to have stricter requirements for investment loans versus loans for primary residences. On the one hand, it makes sense because someone is more likely to do what they can to make sure they stay on top of their payments on the family home than a property that they don’t live in.
The first thing you should do is get a copy of your credit report, preferably from all three reporting agencies (Experian, TransUnion, and Equifax). You can get a free credit report once each year, and whenever you are denied credit by a lender. All other times a credit report costs a small fee.
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Once you have gotten your report you should check it for errors and any negative reports from your creditors. If there are errors on your report, you need to dispute them to get them cleared from your record. You also need to clear up any negative reports by:
· Paying down your credit card debt to less than 25 percent of the credit limit on each card;
· Paying your bills on time;
· Settling any debts that are in collections;
· Keeping your accounts open, to build a credit history.
If you find that you are having trouble doing any of these things, you might consider filing Chapter 13 – a debt repayment plan that can help you get back on track financially, and with a less traumatic hit to your credit than Chapter 7.
There are few creative ways that you can finance the purchase of a home even with bad credit. However, some of these methods might require you to go through traditional lenders and provide alternative information to the usual credit information.
One option is to go with owner financing. There are several different types of owner financing available, but one of the more common is the lease-to-own option. With this option you actually rent the property from the owner for a period of time, with all of your payments going toward the mortgage payments.
These types of agreements are usually drawn for primary residences, but you can draw up something similar for an investment property by essentially taking over the task of managing and renting the property, and charging enough rent that you pay the mortgage and have enough left over to turn a profit.
There are also community programs, such as the FHA, which might offer financing for first-time buyers with spotty credit, if they agree to attend homeowner classes. These types of loans are often for residential properties, but some programs might stipulate that after you can rent the property out after you have lived in it for at least year. Also, once you have had a year’s worth of payments under your belt, your credit will be much better and you can refinance under a more conventional loan program.