Banks typically look for a minimum credit score of 650 when approving mortgages for rental properties. However, alternative lenders can work with investors who have credit scores as low as 500, often with a plan to improve the score over 6 to 12 months in order to qualify for cheaper financing later.
Utilization measures how much of your available credit you have used on unsecured cards, credit cards, and secured lines of credit. Lenders want your utilization to stay below 70% because exceeding that threshold puts pressure on your credit score and can negatively impact your mortgage approval.
A missed mortgage payment is viewed as significantly more serious than a missed credit card or utility payment. If a lender sees a late mortgage payment reporting on your credit, it signals a much higher risk because it relates directly to the type of debt they are considering extending to you.
Even a small unpaid bill, such as a utility bill, can be sent to collections and appear on your credit report. Dalia shares an example of a client who discovered an outstanding utility bill in collections only after applying for a mortgage, which could have derailed the entire deal.
Dalia recommends registering for a paid credit reporting service like Equifax and reviewing your report every quarter or every six months. She notes that this is more accurate than many free online tools and helps you catch collections or errors before you are in the middle of a deal.
