Is Your Credit Score Costing You Thousands of Dollars on Your Investment Properties?

Many investors have made tremendous returns by carefully choosing an investment property and waiting until its value appreciates. They find a property, decide to purchase and usually take out a loan. And for those investors, who buy multiple properties in any given year, may apply for several loans or other lines of credit. But what many investors, both new and old, do not know is that these loans could be costing them hundreds of thousands of dollars in unnecessary interest over the 15 or 30 years of the loan and can significantly affect the future benefits of the investment. You might be asking yourself, how could a loan damage an investment with a 6.1% rate of appreciation (the nationwide average over the last 30 years)? The answer is easy, a credit score.A credit score determines the borrowing status and credit worthiness of a consumer by calculating the likelihood that he or she will become 90 days delinquent or more on a particular loan obligation. You can have more than one credit score, but the one that is most important to investors is the one given by the Fair Isaac Corporation. This score, also known as a FICO score, is the one that mortgage brokers pull when deciding interest rates for potential borrowers. The scores range from 350 to 850. A consumer with a high FICO score (800 or more) will yield a lower interest rate than a consumer with a low score. This is because a high score indicates that the consumer’s odds of being 90 days late or more is about one in 1,300. Therefore, the consumer is rewarded with a lower interest rate. A high credit score can be a huge benefit to real estate investors. For example, if John has a credit score of 640 and wants a $350,000 30-year fixed rate mortgage loan on his investment property, his interest rate could be around 7.42%. If John were able to raise his score 100 points, he could be approved for a loan with a rate of 6.01%. Now that might not seem like a huge difference, but John would certainly feel a change when the bill comes or when he checks his savings. With a 7.42% rate, John’s monthly payments would be $2,426.91. Should he succeed in raising his score 100 points and obtain a 6.01% rate, his payments would be $2,120.76. That’s just over $300 dollars saved each month, making the total savings $110,216.20 over the life of the loan. A 1.41% drop in interest rate just saved John over $110,000. John can now use that money toward another investment property or any number of purchases that could enhance his financial future. Credit scores are especially important to real estate investors, because a decrease in credit score could prevent someone from closing escrow or obtaining the best possible loan for that property. There are several ways to make sure your credit score is not damaging your next investment. First know that there are three major credit bureaus that use the FICO scoring model: Experian, TransUnion and Equifax. They all allow consumers one free credit report a year. It’s best to ask for one report every four months. This way, investors and consumers receive three reports over the course of one year to keep tabs on their credit, to know what their FICO scores are and to see what delinquencies can and cannot be removed.FICO uses several components to determine a credit score. These include, past delinquencies (35%), revolving debt ratio (30%), mix of credit (15%), average age of file (10%) and inquiries (10%). In future articles, I will explain these factors and give a few tips on how to succeed in each of the fields.To learn more about how you can help increase your credit score, go to Financial Solution Services' website at FSSb2b.com where you can find more great information on credit improvement. And, you are cordially invited to sign up for a FREE Credit Repair and Enhancement Workshop by visiting Upcoming Webinars.