If you're a real estate investor looking to refinance a property after completing renovations, you may have encountered some credit score challenges. In this blog post, we'll explore the minimum requirements for a DSCR (Debt-Service Coverage Ratio) loan and how credit scores can impact your eligibility. We'll also discuss a smart strategy involving business entities to ensure your credit remains strong while financing your real estate ventures.
The Minimum Credit Score Requirement
Shirley, a real estate investor, faced a common dilemma when her FICO score dropped to 670 after finishing property renovations. She wondered if she could still qualify for a DSCR loan. According to Beau Eckstein, an expert in the field, the usual minimum credit score cutoff for such loans is 660. Some lenders may accept scores as low as 640, but there's a catch.
The Pitfall of Personal Credit Cards
One significant issue affecting credit scores during property renovations is the use of personal credit cards. Beau highlights that a substantial portion of credit scores, approximately 33%, is influenced by utilization. If you have a $10,000 credit card and it's charged up to $8,000, you're utilizing 80% of your credit limit, which can significantly lower your credit score.
Leveraging Business Entities
So, what's the solution? Beau suggests utilizing a business entity for your real estate endeavors. When you obtain credit within a business entity, it doesn't appear on your personal credit report. This strategy safeguards your personal credit score from the negative impacts of property renovations.
Credit Score Impact on Loan-to-Value Ratio
Why is maintaining a good credit score crucial? Beau explains that your credit score directly affects the loan-to-value (LTV) ratio. If you have a stellar 750 credit score, you might secure a 70% or even 75% cash-out refinance. However, with a 670s credit score, your LTV might be capped at 65% or 70%. Lower credit scores result in a “haircut” on your financing terms, leading to higher interest rates.
The Credit Score Game
Beau emphasizes that playing the credit score game is essential to secure the best pricing and highest leverage in the DSCR world. He shares his own experience of seeing his scores drop to 580 despite not missing any payments due to improper utilization. To achieve the best financing terms, it's crucial to manage your credit scores effectively.
The Power of a Strong Credit Profile
Maintaining good credit scores and a strong credit profile not only helps secure better financing terms but also accelerates credit approvals. Beau advises real estate investors to consider paying off debt and exploring business credit options for future endeavors.
Schedule a Strategy Call
To get personalized guidance on your real estate investing goals, Beau Eckstein offers free strategy calls. Whether you have a large portfolio or are just starting out, his framework has helped numerous investors grow their real estate businesses.
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In conclusion, navigating the world of DSCR loans and credit scores requires careful planning. By understanding the minimum requirements and implementing smart credit strategies involving business entities, you can secure the best financing terms and achieve your real estate investment goals.