What Bad Credit Does to Real Estate Loans’ Costs

Bad credit on real estate loans could cost you thousands over time. Here’s what you need to know.

There are multiple types of lender approaches to credit and real estate loans.

Some jack up the interest rate and leave loan fees alone, knowing you may not do the loan if you have to bring in extra funds. Other lenders keep rates low but add a lot of points. Some will add to both for bad credit.

You’ll have to talk to the lenders near you to find out what type they are. Let’s go through a couple examples and what to look for with credit and real estate loan costs.

What Costs Look Like for Bad Credit on Real Estate Loans

Here is an example of a lender who raises the interest rate and charges more points.

Firstly, the interest rate:

Secondly, here’s the additional fees based on credit score:

So with this lender, if you have a 699 credit score instead of a 740 for a fix and flip loan, then they will raise the rate by 0.5% and charge you an extra half a point.

Now, if your score drops down to 679, the rate goes even higher and the costs rise to 1 full point over your competitor with a 700 score.

How Much Does Bad Credit on a Real Estate Loan Cost You?

So let’s say we have a $300,000 loan. What does that one point difference on our credit score do if we have a 699 instead of a 700?

It costs us half a point on our rate (an extra $125 per month), plus $1,500 in closing costs ($300k x 0.5 points).

But if your score is just 21 points under 700, at 679, it will cost you $250 more per month, plus $3k in closing costs ($300k x 1 point).

Do 5 flips a year (with a 6-month turn) at a 679 score, and you would run up an extra $24k in costs over your competitors.

How to Help Your Credit for Investing

You can let your lender enjoy those funds or enjoy them yourself.

Every point counts. $24,000 a year is worth fixing your credit.

If usage is making your credit score go down, you can try these fixes.

You can also find other credit and real estate investing tips here.