Published November 8, 2024.
Written by Gisele Afman.

Can I Invest in Real Estate with a Low Credit Score?

Investing in real estate is one of the best ways to build wealth, but what if your credit score isn’t where you’d like it to be? The good news is that yes, you can still invest in real estate even with a low credit score. In this post, we’ll outline a few strategies and loan options to help you get started in the Southern California real estate market, even if your credit history isn’t perfect.

1. Understand What’s Considered a "Low" Credit Score

First, it’s important to know what a "low" credit score is. Generally, FICO credit scores are classified as follows:

• Excellent: 740 or higher

• Good: 700 to 739

• Fair: 650 to 699

• Poor: 600 to 649

• Very Poor: Below 600

In Southern California, especially in competitive markets like Los Angeles and Orange County, a credit score above 650 is often needed for favorable mortgage terms. However, you can still qualify for financing with a lower score—especially if you consider government-backed loan programs.

2. Explore Government-Backed Loan Programs (FHA and VA Loans)

If you're buying your first home or making your first real estate investment, there are several government loan programs designed to help buyers with less-than-perfect credit. These programs tend to have more lenient qualification standards compared to conventional loans.

FHA Loans

FHA loans, backed by the Federal Housing Administration, are one of the most popular options for buyers with lower credit scores. While conventional loans typically require a credit score of at least 620, FHA loans can approve buyers with credit scores as low as 580 (with a 3.5% down payment) or even 500 (with a 10% down payment).

VA Loans

If you’re a military veteran or active-duty service member, a VA loan might be an option. VA loans are known for their low-to-no down payment requirements, and they don’t have a specific minimum credit score requirement, though most lenders prefer a score of at least 620.

3. Consider a Subprime Mortgage Lender

If government-backed loans aren’t an option, you might want to consider a subprime mortgage lender. These lenders specialize in providing loans to people with low credit scores. While the interest rates on subprime mortgages may be higher, they can still help you qualify for financing, especially if you’re looking to purchase a fixer-upper or investment property.

4. Save for a Larger Down Payment

When your credit score is lower, you may be required to make a larger down payment to compensate for the risk lenders perceive in your loan application. In Southern California, where property prices can be high, this might feel daunting. However, a larger down payment (20% or more) can sometimes offset a low credit score, making you a more attractive borrower to lenders.

In addition, a larger down payment will help reduce your mortgage insurance costs and lower your monthly payments, which can make investing in real estate more affordable in the long run.

5. Look for Alternative Financing Options

There are several other financing options available to real estate investors with low credit scores. Some investors turn to private lenders, who may be more flexible with credit score requirements than traditional banks. You can also explore hard money loans, which are short-term loans that focus more on the value of the property than your credit score.

While these options can be more expensive (due to higher interest rates), they can still help you secure the capital needed to invest in real estate, especially in Southern California's competitive market.

6. Consider House Hacking or Multi-Family Properties

If you’re looking to invest in real estate but want to reduce the financial risk, consider a strategy called house hacking. This involves buying a multi-family property (like a duplex or triplex), living in one unit, and renting out the others. The rental income from the other units can help you cover the mortgage payments, making it easier to manage with a lower credit score.

In Southern California, this strategy can be particularly effective in cities like Covina, Pomona, and Riverside, where multi-family homes are still relatively affordable compared to the coastal areas.

7. Work on Improving Your Credit Score

If you’re not in a rush to invest and you want to secure the best possible mortgage terms, working on improving your credit score might be a good strategy. Even small improvements in your credit score can lead to significantly better loan terms and lower interest rates, which can save you thousands of dollars over the life of a mortgage.

Some ways to improve your credit score include:

• Paying down high-interest debt

• Disputing any inaccuracies on your credit report

• Avoiding new credit inquiries

• Keeping your credit utilization low

8. Partner with a Real Estate Agent Who Understands Your Situation

Navigating real estate with a low credit score can be tricky but working with an experienced real estate agent who knows the ins and outs of financing options is crucial. A knowledgeable agent can help you explore available loan programs, negotiate with lenders, and find properties that are within your budget.

Our team in Southern California specializes in working with first-time buyers, real estate investors, and clients with less-than-perfect credit. We can help you identify financing opportunities, connect with trusted lenders, and make the process of buying or selling a home as smooth as possible.

Final Thoughts

So, can you invest in real estate with a low credit score? Absolutely! While a low credit score may limit some of your options, it doesn’t prevent you from entering the market. Whether you choose to take advantage of FHA or VA loans, consider alternative financing methods, or save for a larger down payment, there are plenty of opportunities to help you get started in the Southern California real estate market.

If you're ready to explore your options and start investing in real estate, contact us today. Our team can guide you through the process, no matter what your credit score looks like!

For more information on real estate opportunities in these areas, feel free to contact the Marty Rodriguez Team. We’ve been helping our clients make the right decisions about real estate in Southern California since 1978!