What is a favorable credit score to get a commercial real estate loan approved? This is probably one of the first questions an investor would ask. There is no absolute easy answer to this question because credit score requirements vary dramatically between different lenders and are also based on numerous factors.
There are few general guidelines that real estate investors must be aware of that will help them improve their credit score and the chances of getting a commercial real estate loan approved.
As you might know, there are different types of investment property loans, and you should consider the individual credit score requirements needed for all these types of loans because credit scoring requirements vary from one type of loan to another.
Doing this prior hand will let you put efforts in the direction of improving your credit score before you apply.
In this blog, we will walk you through the basic things you need to understand to boost your credit score and get your desired loan approved.
Larger the loan amount, the higher the lending standards
As a rule of thumb, we can understand that the bigger the loan amount, the higher will be the lending standards. In other words, Jumbo loans expect higher lending standards.
What are Jumbo Loans?
A Jumbo Loan is a mortgage that exceeds the conforming loan (explained in the following paragraphs) limit. Jumbo loans are not eligible to be guaranteed by Freddie Mac or Fannie Mae. Jumbo lenders tend to have higher lending standards and need borrowers to qualify for greater credit scoring requirements.
It is difficult to predict the exact requirements as it varies significantly from one lender to another, along with other numerous factors like your income, debt, asset-based qualifications, etc.
However, generally, it is noticed that lenders lend Jumbo loans to borrowers who carry an average credit score of 700 for an investment property loan.
Conforming mortgages
A conforming mortgage is a mortgage that meets the standards of Freddie Mac and Fannie Mae. In most parts of the United States, the conforming loan limit is $ 484,000 for a single unit property.
Generally, you can expect that this limit would be much higher for multi-family properties. You can also notice that Fannie Mae publishes an eligibility matrix that mentions the minimum lending standards, including the down payment requirements, income limits, and other liquidity reserves.
Although it is difficult to predict what could be a favorable credit score, you can be assured that if you qualify other numerous standards, a credit score of as low as 640 will also get your loan funded on single-unit investment properties. These low scores compensate for the high down payment you make and fulfil the requirement of having at least six months’ worth of liquid reserves.
Also, investors need to know that these are Fannie Mae’s minimum lending standards, and it is not the general rule of thumb. Individual lenders set their own learning requirements, so it’s always suggested that borrowers maintain slightly higher scores than the minimum cutoff.
You can head over to Fannie Mae’s current eligibility matrix to know all about the latest minimum conforming loan standards.
Asset-based lenders also give credit scores large importance.
While discussing the options, you have to obtain a long-term mortgage, and you generally have two important types to explore. The first one is conventional and generally includes banks and other traditional lending institutions, including popular mortgage companies.
The second category is the asset-based lenders who originate investment property loans based on the collateral you provide or the property you intend to purchase. Asset-based lenders are not very much interested in a borrower’s personal tax income or their employment situation.
As the term “asset-based” implies, asset lenders really care mainly if the property a borrower intends to purchase is capable of generating enough cash flow to justify the loan amount.
However, this does not mean that asset-based lenders are not interested in your credit scores. As a matter of preliminary screening, asset-based lenders are known to use a borrower’s credit scores initially. The good news is that unlike banks and traditional lending institutions, asset-based lenders do not base their decision of lending solely on a borrower’s credit score.
A borrower’s credit score is only one of the many factors that asset-based lenders consider when making their lending decision. In most cases, asset-based lenders are more than happy to offer loan to borrowers who can justify the loan amount and can be sure the lender about repayment of the loan along with the assurance of on-time payments by illustrating a projected statement of income for the next few months or weeks depending upon the loan period.
Asset-based lenders are generally known to be much more flexible than banks and other traditional lending institutions. They are known to favor borrowers who illuminate confidence in repaying their loans.
You must know that a higher credit score will always put you in a better position to avail yourself of better loans with fewer down payment requirements and fewer origination fees. Just like traditional loans, the exact cutoff will again depend on the individual lender you’re dealing with, but a credit score of 720 or higher is a safe place to be in. If you suffer from a poor credit score, you will have to compromise by paying huge down payments.
In a nutshell, you should understand that asset-based lenders do not have any standardized minimum lending requirements, unlike conventional lenders and banks. Their credit score implications and requirements vary from a case to case basis.
Hence if you plan to get your loan funded from an asset-based lender – it is always a smart idea to first understand what your lender is looking for and then craft your pitch accordingly.
Working on improving your credit score is definitely a great way to boost your returns, but that’s not all.
Regardless of whether you want to get a loan funded from banks or traditional lending institutions or an asset-based private lender – it is always a good idea to improve your credit score, which will definitely boost your chances of getting your loan approved and also increase your overall returns.
However, if you cannot improve your credit score – that does not mean you have no shot at entering the commercial real estate business. You can still get your loan funded from a private lender and shift your focus to improving your property returns.
Remember that there are several ways of boosting your investment property returns, and getting a good loan price is just one of the many ways. For instance, you can make simple capital improvements to the property, increasing your rental income, or negotiating with an asset management company on prices for a lower fee.
Additionally, you can also negotiate a lower purchase price with your property owner. Thus, don’t let your low credit score get in the way of your commercial real estate investing.
