Guest Article by Mark Ferguson InvestFourMore
When buying an owner-occupied house with a 30-year mortgage, a buyer’s credit score is vitally important. Most banks will not lend to someone with less than a 620 credit score. When getting loans for house flips, the credit score is not nearly as important. The reason the credit score is not as important is that the type of loan is completely different when you flip houses. House flippers tend to use private money, hard money, or partners when flipping houses. There are some banks that lend on flips, but they are rare and even they may be more relaxed with credit scores on house flips.
Why do house flippers use a different type of loan than owner-occupied buyers?
Some local banks will lend on house flips but most big banks will not touch them. There is much more risk involved with house flipping, and the loans have a much shorter term. Most banks sell their loans to other institutions and they cannot do that with most flip loans.
House flippers typically use hard money, private money, or partners to finance their deals. These financing options have much more flexibly than a traditional bank because they do not have to abide by the regulations that banks do. You can learn more about these financing options here: How to Finance a Fix and Flip.
If a house flipper does use a bank to finance a flip, they do not use a 30-year loan. They will use short-term loans from local banks who are willing to lend on a house flip. Since house flippers rarely use traditional banks to finance their projects, credit score is not as important as it is to a regular buyer.
Can someone still get a 15- or 30-year mortgage on a house flip?
Even though a 15- or 30-year mortgage is not meant to be used on a house flip, that does not mean people don’t use them. The problem with using a long-term loan on a short-term project is the banks will see what you did after the house is sold. They will wonder why the home was sold quickly, and if it happens more than once, they may question if the client is flipping houses.
If the bank thinks you are flipping houses with long-term loans they may stop lending to you. Even if you are trying to buy an owner-occupied home, they may not believe you. You might get away with using a long-term loan on a flip once or twice, but it is not a long-term strategy and could hurt you with banks in the future.
Why is credit not as important on house flipping loans?
I want to be clear that credit is important when getting a loan to flip, but it may not be as important as it is with other types of loans. Hard money lenders will most likely pull credit, but they will also look at the cash the investor has available and how good the deal is they are trying to flip.
Private lenders may or may not look at credit depending on the relationship you have with that lender. They will look at the deal and need to have a lot of trust in the investor.
Even local banks may not take credit score into as much consideration on flip loans. They typically hold the loans in house and will make the determination of how credit worthy the investor is. If they have a marginal credit score, but hundreds of thousands of dollars in the bank, they may make an exception.
How bad can your credit be for you to still get a flip loan?
Just because some of these lending sources may not look at a credit score as much as a traditional lender, does not mean they will ignore everything. When I fill out an application for a hard money lender, they will ask if I have had bankruptcies, been sued, or had any foreclosures on top of asking for my credit score.
If everything else is great and you have a 550 or 600 credit score you may be able to get a loan if you have experience flipping. If you have really bad credit, they may deny you no matter what the rest of your finances look like.
If you have a marginal credit score and some other hiccups in your financial background, they may deny you as well. Or if you have a perfect credit score, but no money and they don’t think the flip you are trying to finance is a good deal, you could get denied.
Credit scores play a role in getting a loan on house flips, but they are just a small part of the equation. Lenders will look at your financial history, cash available, and the deal. If you have bad credit and a shaky financial history, it may be tough to get a loan from a bank or hard money lender. Private money or a partner may be the only option if you know the right people.
About Mark Ferguson
Mark Ferguson is a real estate broker, real estate investor, author and the creator of Investfourmore.com. Mark owns a real estate brokerage, has flipped over 155 houses, owns 20 rental properties and has written six books. InvestFourMore is a real estate blog with over 300,000 views a month, over 35,000 subscribers and more than 500 free articles.