Credit Score Mistakes Real Estate Investors Must Avoid Before Getting a Loan

Kristi Nowrouzi (00:00)
Absolutely. So here’s the most tragic thing that could happen. Somebody loses their job and reaches out to me to get a loan to tap into that equity of their home and they don’t have income. So I love to make sure that people are prepared with the home equity line of credit, even if you don’t have anything outstanding now on it, it’s kind of like a credit card because it is a revolving trade line.

Dylan Silver (01:52)
Welcome back to the show. Today we’re joined by Kristi Nowrouzi, the founder of My Preferred Lender, where she has spent more than a decade helping real estate investors secure financing. Kristi thanks for taking the time today.

Kristi Nowrouzi (02:06)
Awesome to be here with you, Dylan. Thank you.

Dylan Silver (02:08)
For folks who are scaling businesses as lenders, how can they most effectively capitalize on their sphere?

Kristi Nowrouzi (02:17)
I love this question. I love people. I love on my sphere. I love my sphere. And I think the the one most underrated thing that people miss out on is the opportunity to ask your friends or the people that you know for who do they know? And I think it’s just ingrained in our body that we want to help other people. And so when I call somebody and I say, hey, Dylan, you know, and we catch up and I ask how the family is and and all of those things, because that is.

First and foremost and most important to me. And then I ask, hey, I’m looking to be introduced to a fill in the blank. Who do you know? Or I might ask them, like, hey, on a scale of one to 10, how would you rate your CPA or your financial advisor, whoever, whoever I’m trying to get in front of? And if they say anything higher than an eight, I’m like, my gosh, that’s exceptional. It’s hard to find somebody that has earned that kind of trust. Could I ask a favor of you? Would you mind introducing us on an email?

And then instantly, Dylan, you’ve got that triangle of trust. The financial advisor or CPA loves and appreciates that their client is looking out for them and introducing them to another professional that could help them in their business. And we’ve we’ve got this relatedness now. And it’s a warm call when I reach out to that financial advisor, that CPA, that realtor that I’m trying to get in in front of. And I I think people might be scared to ask for an introduction from their sphere as if there’s

something implied or or of them. If somebody doesn’t feel comfortable introducing or referring, they’ll just say, Hey, I may not I may not be able to to help you with that. Or I I can’t think of anybody right now. And that’s okay. Plant the seed and say, hey, if you, if you come across, if you meet somebody who’s really great, I’d love an introduction. So you’ve done your part.

Dylan Silver (03:59)
You know, there’s a lot of people who oftentimes will realize that so much of their day-to-day life could be part of their business, but they think, well, I I’ve talked to these people for a while, they know what I do, and then they’ll see, you know, if they’re a a realtor, they went and used another realtor. If they’re a lender, they went and will, you know, use someone else as as their lender. And that can feel like, well, what about me? I’ve known you this whole time, right?

Kristi Nowrouzi (04:22)
That’s right. It it I will say this. Don’t underestimate the power of the ask. I’ll use a quick example. I am the MC for the Christian chamber that I’m associated here with in Central Florida. And I get to be in front of, I don’t know, 125, 150 people every single month at this luncheon. And I get to, you know, keep us on track and introduce us the keynote speaker and all these things. I can’t tell you how many times I’ve had conversations with people throughout the chamber and they’re like, I thought you were employed by the chamber.

Like I volunteered just, you know, running running the show during the luncheon an hour and a half once a month, and they didn’t realize I was a mortgage loan officer. It says it all over my screen when I’m introduced. I I talk about it at my tables when I’m I’m going around. And it’s surprising to me how many people don’t know. So to presume or assume that somebody knows what you do, unless you’re planting that seed, reminding them how you can take care of them.

And that’s another thing. And if I just asked somebody the last time I spoke with them to introduce me to somebody, this time around I might say, hey, could I ask a favor of you? Could you keep your eyes open for somebody who might confide in you that they’re really struggling with, you know, debt right now or they got their hours cut back or something like that, because there’s a great opportunity where I could take some pressure off and help utilize some of that equity in their home so that they can stay away from high interest rate consumer debt and maybe do something with the equity.

All I’m doing is saying, hey, keep your eyes open for somebody who might need help because you like and trust me and I might be able to help them. I’m not asking for business from them. I’m asking them to keep their eyes and ears open. And just by planting that seed, it’s amazing how many times this shows up in your lap. It’s because that that what is that called?

Dylan Silver (06:53)
I don’t know.

Kristi Nowrouzi (06:54)
Particular

activator where you’re focused on something, it comes your way. Right. And so what I’m doing is it is I’m just activating that part of their brain to think or be aware for something that I’m asking for some help with.

Dylan Silver (07:08)
That’s like the red car theory, right? It’s you don’t you don’t see red cars and then you see one and you’re like every other car is now a red car and you you keep seeing it. You know, when we talk specifically about you’re talking about accessing equity in in a home and you know, potentially home equity line of credit, right? There’s a lot of folks who are unaware that they can use their home as a bank for them in a way, in an effect, right? And so when you’re having those conversations

with folks. What is their level of exposure to the idea of a HELOC?

Kristi Nowrouzi (07:43)
Most people don’t realize that it’s out there and available. And even for second homes and investment properties, it doesn’t even have to be your primary home. Now, the loan to value might be reduced a little bit if it’s not your primary home, but it is available to you. And there are trillions and trillions of dollars in equity right now across this great country. And yet millions and millions of people are suffering and drowning in consumer debt, meaning high APR credit card debt.

The average American is walking around with over $10,000 at 20 something percent. So you just make that minimal payment. You’ll never get out from underneath that, maybe not in your lifetime. But when you can utilize a home equity line of credit, yes, it is a second lien on your home, but it’s not really different debt. It’s secured debt. That credit card is unsecured debt. And so a lot of times that home equity line can be a

third, if not less, than that APR that you’re paying on that credit card. And it’s a substantial difference in your cash flow every single month. And I can’t tell you how many people are walking around stressed, tired, losing sleep. It’s affecting their health. It’s affecting their marriage, how they’re parenting, because they don’t know how they’re going to make ends meet. And it’s like the solution is right there.

Dylan Silver (09:05)
You know, this is one of the big reasons why people should look at home ownership beyond, you know, owning where you live and being able to quote unquote, you know, have your slice of the American dream, is that again, you can become your own bank. It if worst comes to worst, you’ve been living in this place for five plus years, you probably have some equity, especially in places like where where you’re at in Florida. And I think most of the time,

I’m wearing my realtor hat now. This is a conversation that people aren’t having, right? It’s this idea of, well, if you continue renting, you know, what does that look like if five years from now you don’t make the rent payment? Or you have some situation come up where you, you know, God forbid, lose your job or something like this happens. What do you do? You know, if you have the ability to take out a HELOC, and there’s other products as well, I’ve heard HE loan, HELOC, right?

Then you have, you know, a little bit more of a security net, right?

Kristi Nowrouzi (10:35)
Absolutely. So here’s the most tragic thing that could happen. Somebody loses their job and reaches out to me to get a loan to tap into that equity of their home and they don’t have income. So I love to make sure that people are prepared with the home equity line of credit, even if you don’t have anything outstanding now on it, it’s kind of like a credit card because it is a revolving trade line.

I’m a little bit of a credit geek. I’m a certified credit counselor, a certified credit specialist. And so I can geek out with people and say, hey, if you don’t have a balance.

You don’t have a payment, right? Just like a credit card. And then your payment is typically based on your outstanding balance. But have a home equity line of credit available to you, have it ready and in your name already. So that way, when something happens, because for most of us, we’re either getting out of a crisis, getting ready to go into a crisis, or we’re experiencing a crisis like welcome to life, right? So for all of those unexpected things, you want to have something already, ready for you to pounce onto.

Should you need it. I’ve had, I want to use two quick scenarios. I had somebody reach out to me. They had their primary home here and they turned it into a rental property and moved up to a northern state and they wanted to buy a home up there. So we did a home equity line on their home down here that was an investment property to have the down payment, their 5% down for their home purchase up in Massachusetts. And so we were able to help them become homeowners up there off of their

used to be primary home, now an investment property down here. And I had somebody else recently reach out. They just had their second baby. They’re down to a one income household and their expenses are increasing. And so we got a home equity line of credit so they could pay off their their car payment, which was by the way, $890 a month. And we we paid that off and we paid off a couple credit cards and it reduced their cash outflow by almost $500 a month.

By tapping into the equity of their home. So the debt wasn’t different as far as the dollar amount. It was just moved over and more comfortable.

Dylan Silver (12:35)
I’ve heard of a number of different specialized products where people not not to put you on the spot here, but where people can take out equity from their home and then it’s paid back even on the sale of the home, especially for folks who may be older. Have you heard of this type of equity line of credit?

Kristi Nowrouzi (12:51)
Have it’s not in my realm yet. It hasn’t been a focus of mine. It does exist. I would probably refer that person to I there’s a gentleman that specializes in reversed more reverse mortgages, and I know he had just recently shared with me that home equity line of credit program. And I the ones that I offer are forward mortgages, basically a loan. But that does exist.

That absolutely does exist. You are essentially sharing a part of the equity, the way I understand it on a lot of those that are available. So as long as you go into that with that agreement and that knowledge of what you are giving up, because it usually winds up being a bigger chunk of change than paying interest on that loan. But what I love most about home equity lines of credit, other than the things I’ve just shared, is that a lot of people are tied into a two, three, four percent interest rate and you don’t have to touch that loan.

That can mean in place. And now you have a second loan secured against your property, which is a lower interest rate than most consumer debt.

Dylan Silver (13:52)
Pivoting here, Kristi, as a credit counselor, you know, y I’m sure you must see all types of situations. And certainly, you know, people with maybe high degrees of distress and maybe bills getting floated and and it can be challenging, of course, for lots of people, but especially if you’re looking at buying a home, it can be very discouraging if you’re being told that you need to work on your credit and how long is this gonna take and maybe you need taxes, etcetera. There’s a lot that goes into it as we all know.

What are some of the most common mistakes that you see people making when they’re trying to improve their credit?

Kristi Nowrouzi (15:10)
Most common mistakes, I see a lot of people try to pay off their car not because the payment is high, but they think that that’s going to help their credit. And that actually can have the reverse happen. And here’s why. When you have your credit history being looked at and formulated into that credit algorithm known as your credit score, it is really just looking at the things that are open and active right now.

So you could have had credit for the last 30 years, but if those loans are paid off of those credit cards are closed, it really doesn’t calculate into your current credit score and that algorithm. And so if you pay off that car, you’re paying off that on-time payment history that’s probably several years deep and rich. And now it’s done so. It doesn’t help you. The better way to do it is to pay down credit card balances. Now there’s something called debt utilization, and a lot of times people will confuse this with.

Debt to income. Your income is not reflected anywhere on your credit report, nor are your bank balances. So nobody knows your income, nobody knows your net worth, but they are looking at the the AI that creates your algorithm here. It is looking at how much of your limit are you borrowing. And so if you’re utilizing greater than 30%, you’re getting spanked on your credit score because they’re saying, hey, you’re using too much of what is allotted to you. It’s like, but that’s allotted to me.

Yeah, but you’re using too much. So they smack their hand for it. And a lot of people right now are walking around with what we would call maxed out credit cards. If you’re 90% of your limit, you your score is probably suffering somewhere between 50 and 80 points just because of how much of your credit limit you are utilizing. So the very first thing you should do is work on reducing the balances on credit cards. Also, your payment history makes up 35% of your overall credit score.

So between the balances and your payment history makes up 65% of your credit score. You want the fastest bang for your buck? Pay down those credit card balances.

Dylan Silver (17:07)
Now, as a lender, you’re working with investors. Do you also work with residential buyers, non investors, or primarily investors?

Kristi Nowrouzi (17:14)
Investors and residential for sure.

Dylan Silver (17:15)
Okay. When when you have folks coming to you and they’re trying to get general guidance a as far as the steps that they should take, I’ve noticed as a realtor that basically it always starts with we we have to take a look at your credit. We have to run

Your credit. Beyond that, you know, you need six months in reserves, you know, you’re gonna need to show enough taxes in order to be able to qualify. But are there any other general, you know, broad strokes guidance for folks who may be first time buyers?

Kristi Nowrouzi (17:45)
Absolutely. So payment history, whether you’re renting or you own and you’re going to be buying your first investment property, payment history on your housing makes more of an impact than anything else that’s being reported on your credit report or that underwriters are looking at as far as your ability to repay. So your payment history is super important. There are some lenders that won’t loan to you if you have had a 30-day late in the most recent 12 months.

So make sure your payment history is pay is reflective of 30 days or less that you you you made that that payment, right? So I know when you make your mortgage payment after the 15th, there’s a late fee, right? But it doesn’t hit your credit until you’re 30 days late. So we don’t wanna we don’t wanna make sure, you know, we wanna make sure that that doesn’t happen. The next thing that would be really important, and most people don’t realize this.

Your credit score has more of an impact on what interest rate you’re given than anything else, even down payment. So if I were talking with an investor, for instance, I’m working with somebody right now. She writes off everything she can on her business. It looks like she makes 14 cents a year. And so I said, Hey, send me 12 months business bank statements. I averaged her deposits and I actually just locked in her interest rate today. It’s about three quarters of a percentage rate.

Higher than what it would be if we were going full documentation, but I did the math for her on her loan. And so she’s going to be paying about $2,700 more in interest each year because of that higher interest rate. But we did the math on what she’d be paying if she claimed the income that would be needed to qualify for that rental property. And it was about $27,000 in money to the IRS. So, you know, take your pick. I think the the

Best strategy that could possibly be used is financing real estate to build your wealth, but making sure that you have, just like you’d mentioned, six months reserves. That’s what lenders like to see for each investment property that’s owned. And I think it’s a great way to go because heaven forbid, something happened to the house, something happened to your tenant. You don’t want to be robbing Peter to pay Paul to keep up with that mortgage payment. If you’ve got those reserves there, you have something to tap into.

And that is fiscally wise investing.

Dylan Silver (19:59)
One of the things that has been a common theme for lenders that I’ve had on the show is this idea of being able to use a small it would still be, I guess, single family, but one to four unit home as a way to show additional

Cash flow and potentially qualify for a home. This is still something that seems fuzzy to me and I think many of our audience members cause they’d be thinking, well, I am having difficulty qualifying for a home with one door. Now I’m gonna qualify for a home with four doors? How how does this work?

Kristi Nowrouzi (20:28)
This is such a great question, Dylan. I’m actually working with a veteran right now. He’s he’s turning his current home into a rental property. He’s looking for a quadplex. So four doors. Here’s what this looks like. He’s gonna buy a quadplex. He’s gonna live in one of those. The other three will be rented out. So when we get the appraisal, once he obtains that property, gets it locked down under contract.

The appraiser is gonna do not only a valuation of the property, but they’re also going to pull out of MLS records what fair market rent is for that property. So let’s say it’s a it’s a mix: it’s a three, two, a one-one, a two, two, and a two, two for the squadplex. They’re gonna have different rent for each unit. Well, let’s say our client’s gonna live in the two, two. Then we can use the other three properties fair market rent. And in most cases, not all.

Most cases for like FHA conventional loans or even investment loans, we use 75% of that fair market rent to offset that payment. And so the majority, the lion’s share of that housing payment is now wiped out because of the rent that you’ll be able to receive. So those people who are on the fence or really struggling with affordability, or I may not be able to qualify for a mortgage.

Check out multifamily homes where you’ve got multiple doors, a duplex, a triplex, or a quadplex. Residential mortgages ends at four doors. So it’s got to be a quadplex or less. And then you can use that income even if you’re not an investor to begin with. We can use that 75% to offset that housing payment. It’s an incredible strategy.

Dylan Silver (22:09)
That

is huge. Especially for folks who are interested in themselves being investors, that’s a fast way to get started in the spot that you own, right? That’s gonna be your where where you’re living.

Kristi Nowrouzi (22:22)
It’s a primary

residential loan and so you only have to live there for at least one year before you can move on and do it again.

Dylan Silver (22:29)
And rinse and repeat. We are coming up on time here, Kristi. Any new projects that you’re working on and then anything you’d like to mention directly to our audience?

Kristi Nowrouzi (22:36)
Gosh, I’ve always got projects and I’ve always got goals. Thank you for that. My projects, I have a couple of podcasts. One is called Credit Coaching by Kristi. So if you know of somebody who’s struggling with credit, I’ve got about 150, maybe 160 episodes out there to help teach and and improve credit. I’ve got my podcast called The Peopling Podcast, where I get to interview really amazing people and extract wisdom out of them for connection and communication.

And you told me I could share my book. So this is my number two book and my number three book. I’m working on my fourth one right now, but Finish Financially Free teaches you how to really understand your inherited beliefs when it comes to money. And then the second half of the book is an action plan, which is highly mixed in with real estate because it’s the best way to build wealth for somebody where they can retire as a multimillionaire and Peopling.

It’s all about connection and communication with the people in our lives. So thank you for that opportunity.

Dylan Silver (23:33)
Kristi, thank you so much for your time today. Thanks for joining us.

Kristi Nowrouzi (23:36)
What a blast. Thanks, Dylan.