While credit scores are important in determining borrower approval for a real estate loan and the price of the loan, credit scores are not the only criteria lenders consider. The loan application process for purchasing real estate depends on the type of property being purchased and the borrower’s goal.
If you are borrowing money to purchase real estate, you should pre-qualify for a loan. However, qualification and approval are not the same thing. Pre-qualifying simply means a lender is willing to loan you up to a certain amount. However, the terms of that loan may change between the time you qualify for the loan and the time you are approved. That’s because lenders don’t typically check credit of a borrower during the pre-qualifying process; for pre-approval, credit scores are always checked.
How Important are Credit Scores During the Loan Approval Process?
Lenders look at several criteria to determine whether a borrower is approved for a real estate loan. These include:
- Proof of income or revenue
- Assets (liquid and illiquid)
- Debt load
- And credit score
Whether an individual, a couple, or a business, these criteria are important for most lenders when approving a real estate loan. A low credit score may not result in turning down a loan request, but a huge debt load may. Likewise, lack of income, or negative business revenue, is more likely to result in non-approval than a low credit score, whereas a huge portfolio of assets—cash, equipment, or other assets—may go in your favor. A low credit score is more likely to affect the loan price upon approval.
How Your Credit Score Affects Your Real Estate Loan Price
When it comes to financing real estate, your credit score is very important for the lender. The loan price is determined by the buyer’s credit score and ability to repay the loan.
If you qualify for a $100,000 loan and the property you want to purchase costs $120,000, you’ll need a $20,000 down payment. The price of your loan, however, will be determined by your ability to pay it back and the lender’s risk assessment concerning the likelihood that you’ll pay it back. For instance, huge piles of cash and/or a large monthly income or business revenue may indicate the ability to pay back a loan, but if you have a history of defaults and late pays, those negative actions will have an impact on your loan terms and are reflected on your credit report.
How Lenders Determine the Price of your Real Estate Loan
With residential home purchases, lenders are concerned with the value of the home and the borrower’s ability and likelihood to pay off the mortgage. For investment properties, lenders are concerned about loan-to-value (LTV). A higher LTV means a higher risk for the lender. A lower LTV indicates a lower risk and better prospects for the borrower in terms of how much can be borrowed and the loan price.
Loan price is determined by your interest rate. If you want a lower interest rate for money you borrow to purchase or improve an investment property, then you should pay attention to your credit score.
One percentage point of interest could save you thousands of dollars. If you finance a $100,000 house loan at 3.92 percent interest over 30 years, the total price of your loan will be $170,213. The same loan at 2.92 percent interest and the same amortization period would cost $150,229. Even short-term loans are affected by credit scores. A $250,000 bridge loan amortized over five years at 8.2 percent would yield a $5,093.06 monthly or $1,708.33 interest-only payment. The same loan would cost $4,973.92 monthly or $1,500 interest-only at 7.2 percent interest.
While loan price is determined in part by credit score and LTV, other risk factors for lenders include lien position, property location, occupant status, the property development cycle, your track record and experience in managing real estate projects, and your ability to guarantee the loan. The best way to move forward with your loan is to start the qualification and approval process.