Flipping houses can be a lucrative business endeavor and one of the best investments that you can make — but did you know it can also affect your credit score? If you’re wondering why it affects your credit, keep reading as we explain all that you need to know.
How Should You Finance Your Flip?
Undoubtedly, the best way to finance almost any home purchase is to buy it outright in cash. Not only will you save interest that you would otherwise have to pay to a lender, but you will also save yourself the cost of an appraisal, as well as other closing costs such as a loan origination fee.
Of course, not everyone has the cash to buy a flip home outright, and sometimes you have no choice but to finance your flip through a lender. It is crucial in this case that you do your due diligence and shop around for the best deal. There are loan products available on the market specifically for flip projects; however, whether they will work for you depends on your individual situation. Sit down with a trusted financial advisor or mortgage lender and seek advice if you aren’t sure what your best option is.
Do You Need Good Credit to flip a house?
Not necessarily, although it helps! If you plan to use a conventional bank to finance your flip, it will be extremely difficult without a solid and established credit history. Banks require you to be a ‘low-risk’ borrower in order to offer you the lowest interest rates, and therefore, a less than excellent credit score could hinder your ability to gain an affordable loan.
There are home loan products specifically geared towards borrowers with low credit scores; however, they often have high-interest rates and are usually only suitable if you plan to flip and sell the property very quickly.
How Can Flipping A Home Affect Your Credit Score?
Flipping a home involves various costs and can often go over budget. If for whatever reason you fall behind on your loan repayments while renovating the property, your credit score will be negatively impacted. This will make it more difficult to borrow again.
Likewise, if you do not have the cash to purchase your renovation materials and fun the required labor, you may opt to use a credit card. This can negatively impact your credit score as utilizing a large percentage of your available credit may deem you a risky borrower by credit agencies and lenders. Try to keep your credit utilization under 30% to not negatively impact your score.
It’s important to remember that even if you run up your credit card balances, once you have paid them off your credit score will improve with time. Keep check of your credit score regularly so that you can rectify any issues.
The Bottom Line
If you don’t want to drop your credit score when flipping homes, it is vital that you do not incur any late payments, or run up large credit card balances. Experienced property investors will always take the time to create a budget and stick to it as closely as possible. This can help to avoid spiraling flip costs and protect your credit score.