5 Simple Credit Tips for House Flippers – Before You Apply!
House flipping is a job that comes with great responsibility, requiring a significant amount of organization, planning and funding. The last of those three can be difficult to come by if a good credit score isn’t established first.
An individual preparing for a first house flip will need to make sure their credit is in order to obtain the funds necessary to complete the project successfully. While private rehab lenders are more flexible than traditional banks when it comes to approving you for a loan, they will still look for a strong credit history. Good or excellent credit is proof of good financial decision making skills.
The following simple credit tips should be followed by all first time house flippers to begin establishing good credit. By starting the process of improving your credit well in advance of your financing application, you’ll have the score you need to qualify for financing (and maybe even qualify for a better rate). A little financial planning now can have big benefits when it comes time to fund your house flip.
1. Do not apply for a lot of credit in the year before you want to buy a property
All those credit card offers that come through the mail from department and retail stores can be tempting. Accepting these offers, however, comes with a hefty price. Every credit application you submit will cause a decreased credit score.
Consumer credit cards have a huge detrimental effect on credit score based on the fact that they will presumably increase the cardholder’s liabilities over time. Basically, it’s more room to go into debt.
If you want to successfully receive a mortgage and rehab loan, do not obtain additional credit cards as each application will decrease your score. Put those flyers right into the shredder.
2. Close credit accounts that you don’t need or use, but keep the old ones!
As mentioned, having too many open credit lines, even without balances, can hurt your score. This is because your credit liabilities could significantly increase based on your available outstanding credit.
You can get a good FICO score by having only a few, long-standing accounts that are consistently paid off with low balances. These credit entries show that you live within your income, can control your spending and make payments on time.
Having multiple recent cards with little or no balance will hurt you because of the potential for outstanding credit. To be approved for funding for your house flipping project, its important to close these accounts. See RFG’s loan terms.
3. Keep your window short when applying for a loan
Credit reporting agencies treat auto loans and mortgage loans differently than credit card debt. Multiple credit checks for these types of loans are considered “shopping around” and count as only one credit check, as long as they’re done in a short period of time. The logic behind this is that even though multiple lenders are checking your score, you are only going to buy one house or one car at at a time. Don’t be afraid to shop around for those loans, but keep it limited to a short time period.
Auto loans and mortgages are debts that are paid off over time, they do not increase or have limits like credit cards. Its assumed that if you have had an auto loan or mortgage loan for a significant amount of time, you are likely to continue paying that loan because it is constantly decreasing.
If you think you will be shopping for a mortgage loan, make sure to pay your existing mortgage and car loans on time for at least six months before you apply for a loan for your house flip.
When you are ready to apply for your loan, shop multiple lenders at one time. If you stretch out the process for more than two weeks, it can negatively impact your score.
4. Pay your bills on time!
Paying your bills on time (or not on time) can seriously impact your credit score for better or worse. Late payments on any bill will hurt your score, but late mortgage payments hurt more than late payments on consumer credit.
You should pay all bills on time to successfully secure a rehab loan. If you have to make a choice, however, pay secured loans, such as mortgage and auto, first.
There are plenty of tools available to help you stay on budget and notify you of upcoming bill due dates. Check out Mint.com for more help with paying on time.
5. Do not exceed your credit limits
At Rehab Financial Group, we have seen good borrowers get severe penalties for going over their credit limits on credit cards and lines of credit. Recently, a borrower had their score drop 80 points because they went $183.00 over their $20,000.00 credit limit. Despite the fact they paid down the overage in the same month, the credit score dropped significantly for a small infraction.
We have seen this happen with small overages on credit cards also. It is very very important to not exceed limits. Even if the credit issuer protects you and honors the overage, the effect on your credit score can be disastrous.
Start Now, and Be Patient.
You will see positive results and a higher credit score if you follow these credit tips for house flippers. Remember that credit scores will evolve. They won’t get better overnight, so you need to be strategic before entering the house flipping business and have a strong credit profile ahead of time. Follow these credit tips for house flippers and you’ll be well on your way to qualifying for rehab financing. Start now!