• Bryan Trent

How does credit score impact your ability to get a construction loan?

While your credit score is an important factor in the construction loan approval process it is not the only thing that is considered. In fact, even borrowers with less than ideal credit can often get their loan approved with Builders Capital given certain conditions.



FICO Scores


Almost all lenders will pull your credit and check your #FICO scores prior to approving and issuing you a loan. The FICO score is considered the industry standard for quickly assessing a person's credit history and credit worthiness and it helps lenders determine the likelihood that an individual will adhere to their financial obligations. In fact, lenders doing loans in high volumes know that statistically speaking a certain percentage of borrowers within each credit score range are likely to default on their loans.


Borrower Risk


Let's say for example, hypothetically speaking, that you have a FICO score of 650 - considered "fair". Let's also say hypothetically speaking that your lender has seen a historical trend that borrowers with credit scores in the fair range default on their loans an average of 5% of the time. If that were so your lender would then likely assume your risk of default to be 5% because you would be grouped in with other borrowers having similar credit scores.


Contrast that with borrowers having excellent credit scores who may historically default <1.0% of the time, hypothetically speaking. Clearly, a borrower with excellent credit would be an easier approval decision than a borrower with a lesser credit score and a borrower with excellent credit would potentially be offered better rates or terms than borrowers with lower credit scores.


Which Credit Score is Considered?


Borrowers should understand that there are three major personal credit reporting bureaus in the United States. Trans Union, Experian and Equifax. Each bureau may have slightly different information pertaining to your personal credit history since not all credit related data is reported to each of the three credit reporting bureaus. The result is that most borrowers will have 3 different credit scores. So, which credit score is considered?


The answer may change depending on who you are borrowing from. I believe that most lenders put the greatest weight on your middle credit score. So, if you have credit scores of say 600, 650 and 700 your lender will likely consider you to have a credit score of 650. Different lenders may look at the numbers differently. For example, some may average the three numbers or take the lowest number.


How does my FICO score impact my ability to get approved for a loan?


In contrast to banks, private lenders like Builders Capital have a lot of flexibility when considering approval of a loan because they lend private investment capital that is not as highly regulated by the government. In other words, to a much larger extent in comparison with banks, private lenders get to decide who they want to loan money to, what projects they want to lend money for, and what their lending criteria are. In short, private lenders sort of get to make up their own rules (at least to an extent). That doesn't mean your credit score is ignored by a private lender. Rather, it means that if you have less than ideal credit a private lender may be willing to consider alternative means of helping you get your loan approved.


Let's look at a hypothetical example:

For obvious reasons lenders always prefer a borrower with a great credit score. However, it is not uncommon for borrowers in the home building industry to have credit challenges. If your credit is challenged you certainly should work to improve your credit score as soon as possible. However, until your credit score increases it probably isn't the end of the world for you as long as you are working with a great lender like Builders Capital and an experienced loan officer who you can trust. You and your loan officer simply need to think outside of the box.


If you have additional questions about your credit issues, or about a specific project please reach out to me. Answers are always free!


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 Email: bryan@builders-capital.com

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