Investing in real estate can be an excellent way to build long-term wealth, but it can be challenging if you have bad credit. Fortunately, there are several strategies those with poor credit scores can use to break into the property market. This article will explore 5 key methods, including using an FHA loan, getting a cosigner, looking into alternative lending options, buying investment property, and partnering with others to purchase real estate. Properly implementing these approaches can help you begin investing in real estate and reap the stable returns it offers over time, even with less-than-ideal credit.
Leverage FHA loans that only require a small down payment
One of the best options for investing in real estate with bad credit is an FHA loan. FHA loans only require a 3.5% down payment and are an attractive choice for first-time and low-income homebuyers. Since they are insured by the Federal Housing Administration, underwriting standards are more relaxed regarding credit score requirements. Many lenders will approve FHA loans even with credit scores around 500-550. This makes it one of the easiest mortgage programs to qualify for if you have bad credit. Just make sure you have enough savings for closing costs and that 3.5% down payment. This will allow you to purchase investment properties like single-family rentals relatively affordably.
Get a cosigner with good credit to strengthen your loan application
If your credit score is very low, getting a cosigner with a strong credit profile can improve your chances of approval substantially when applying for a mortgage. The cosigner does not need to contribute any cash for the down payment or closing costs, but they do take on equal responsibility for repaying the loan. Many people have family members with excellent credit who may be willing to cosign so they can get into real estate investing. Just make sure to have clear expectations about financial obligations and pay the mortgage on time every month to avoid straining that relationship.
Explore alternative lending options catering to bad credit borrowers
In addition to FHA loans, there are several other alternative mortgage programs available for those with poor credit scores below 600. Two options worth investigating are manual underwriting from certain portfolio lenders and hard money loans. Manual underwriting looks more closely at your overall financial profile instead of just relying on your credit score. Hard money loans are more expensive short-term financing based on the asset value rather than your creditworthiness. While the rates and terms aren’t ideal, both allow you to buy real estate with bad credit. Just be cautious about qualification requirements and make sure the deal pencils out if you leverage these non-traditional lending sources.
Buy investment property focused on cash flow, not credit scores
One smart approach is to invest specifically in rental properties that generate ongoing cash flow, instead of solely owner-occupied homes requiring mortgage financing. Multi-family properties with existing tenants, single-family rentals, and other commercial real estate can produce regular passive income that offsets your monthly expenses. By focusing more on the underlying fundamentals of the deal rather than your credit score, you may find motivated sellers willing to finance sales themselves. And if purchasing with cash, your poor credit does not matter, opening up possibilities to build your portfolio. Cash-flowing investment property can be a strategic way to enter the real estate market while repairing your credit profile over time.
Partner with others via crowdfunding platforms or REITs
Finally, those with bad credit can get exposure to real estate investing by partnering with others through crowdfunding platforms and real estate investment trusts (REITs). Crowdfunding allows you to contribute to deals led by experienced sponsors taking care of details like acquiring financing and property management. REITs let you invest in portfolios of large commercial properties and cash flows without needing to qualify for any loans. While returns may be lower in these options, they provide passive real estate investments you can make despite having poor credit. Take time to research sponsors and markets when investing this way to maximize success.
If you have bad credit, investing in real estate may seem out of reach, but it is definitely still possible. Arm yourself with knowledge of specialized lending programs, get creative on deal structures, leverage partnerships to access better financing, and remain focused on cash flow over credit scores. Stay determined and flexible using this array of strategies to break into the property market, even with less-than-stellar credit.