Epic Real Estate Investing - Why Good Credit Doesn't Work Anymore | The Black Box | 1442

Episode Date: March 13, 2025

In this episode, discover why 45% of prime borrowers are getting rejected despite having good credit scores. With banks now using black box algorithms analyzing 132 hidden variables, traditional metrics like credit scores have become less relevant. Between new Buy Merge rules and major lenders demanding higher income floors, the lending landscape has shifted dramatically. Learn how AI-driven algorithms and tightened regulations are affecting loan approvals, and explore strategies to navigate and secure funding in this challenging environment. A detailed funding guide is included to help you stay ahead of these rapid changes. Jessica's funding playbook: https://docs.google.com/document/d/1qXurYfk_cKZUoQO1lDmaEN1MlCTnYwrj28FXFapRZ8E/edit?tab=t.0 Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. Hey, strap in. It's time for the epic real estate investing show. We'll be your guides as we navigate the housing market, the landscape of creative financing strategies, and everything you need to swap that office chair for a beach chair. If you're looking for some one-on-one help, meet us at rei-i-a-s.com. Let's go, let's go, let's go, let's go, let's go, let's go.

Let's go. If you think having good credit guarantees long. approval, you're about to discover why 45% of prime borrowers now get rejected. Banks have deployed publicly undisclosed black box algorithms analyzing 132 hidden variables, from your education level to grocery purchases. Yeah, they can see all of that. A 2025 Federal Reserve study reveals 68% of these rejections stem from criteria having nothing to do with credit scores or payment history. So while you've been focused on maintaining that 700 credit score, here's what changed. With consumer protections being stripped away and banks now legally

ignoring one-third of your credit history under new bi-merge rules, traditional credit metrics have become increasingly irrelevant. So while you work on your simple credit score, banks have moved far beyond simple. Their AI-driven algorithms analyze everything from your shopping habits to your educational background, creating an entirely new framework for rejection that most people don't even know exists. The numbers tell a stark story. where banks once allowed debt-to-income ratios of 43%, they've now compressed that to 35%. This single change has instantly disqualified 28% of previously eligible borrowers,

and this disqualification rate persists even for applicants whose financial profiles improved year over year. But it gets even more concerning. Major lenders have quietly implemented a $150,000 income floor for their premium credit products. Regardless of your credit score, This one requirement automatically excludes 82% of U.S. households. And even more troubling, when these rejected prime borrowers get denied, 22% of them turn to predatory lenders. That's a staggering 650% increase since 2020.

These high-cost alternatives create a devastating cycle where borrowers end up spending an average of 38% of their income just on fees. No wonder that consumer debt bubble is what experts are predicting that's going to bring it all down this time. The transition to buy-merge credit reporting in late 2025 is making this situation even more challenging. Banks can now ignore positive payment histories from less used reporting agencies, requiring only two bureau reports instead of three. This gives lenders unprecedented discretion to cherry-pick which aspects of your credit history they want to consider. And here's what most people don't realize about today's credit requirements. Over 60% of banks now demand at least two active credit lines aged 24 months or more.

And this creates an impossible catch-22 for first-time borrowers and strategic credit users who've made the seemingly responsible choice to close unused accounts. Even the subprime lending market, traditionally a last resort for rejected borrowers, has tightened significantly. Subprime lenders like op loans, which markets itself as a payday loan alternative, trap borrowers in a dangerous cycle. While they only require $1,500 of monthly income, their 160% APR loans cost 2.6 times the borrowed amount. So, for example, your average aspiring real estate investor, a $4,000 emergency repair loan would mean repaying $6,600, a burden that could force them to use predatory lenders when the next crisis hits.

The collateral requirements tell an equally troubling story, where 95% loan-to-value ratios were once standard, most lenders now capital. residential LTV at 80% while demanding 50% or more equity for investment properties. To put this in real terms, a rental property that required $25,000 in equity just a few years ago, now demands $62,500, a staggering 150% increase. But here's something even more disturbing. Nearly one in five loan denials now stem from dormant legal judgments uncovered through AI-enhanced title searches. Unlike credit reports that clear judgments after seven years, these systems dig back 20 plus years into state court records. Here, get this. A 2004 class action revealed that 12% of rejected applicants had unknown judgments under $500 from the early 2000s.

The psychological impact of these rejections is profound. They've done actual research on this, and it shows 68% of denied prime borrowers report diminished financial self-efficacy, while 41% develop avoidance behaviors around credit applications, which is kind of a weird thing to study, but that's what they've found. In fact, 73% of first-time denials lead to delayed home purchases by three or more years. While these numbers tell a brutal truth, they represent real people facing real consequences. Take Jessica, a private client of mine, for example. She is exactly the kind of responsible borrower who thought playing by the rules meant

guaranteed access to funding. Like many real estate investors, she did everything by the book, maintained a prime credit score, secured reliable tenants, and generated consistent cash flow from her property so she could make that mortgage payment every month, and she did.

But when unexpected repairs threatened her property's value and tenant satisfaction, Jessica discovered firsthand how the lending landscape had shifted. Despite her excellent credit profile, her local bank rejected her application for a business loan. She became part of, of that 68% of prime borrowers caught in the black box rejection cycle.

We've been able to fix that for her since, but Jessica's situation perfectly illustrates why the Mark Twain quote remains relevant today. A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain. The traditional banking system continues to demonstrate this principle, offering credit most readily to those who need it least. But here's where the story takes an interesting turn. While 22% of rejected borrowers turned to predatory lenders with those devastating 38% fee structures,

a select group of entrepreneurs has discovered a different approach, a loophole, if you will. They've learned to secure funding before they need it and they found a source for it. Because trying to get it when you actually need it, that's when those 132 variables in the banking algorithms work against you. Smart entrepreneurs understand that using other people's money isn't a one-time opportunity. It's a powerful tool that can be leveraged repeatedly to scale your business. For those who resonate with Jessica's struggle or simply want to learn how to navigate today's unpredictable lending landscape, I've included a detailed funding guide below that breaks down everything that we discussed, plus some insider tips, and it's just a link to a Google Doc.

I don't need your email address or anything like that. And it'll give you a comprehensive breakdown of today's lending reality, specific steps to take if a bank says no to you, a detailed decision matrix for, choosing your funding options and industry comparison snapshots and clear next steps to secure your funding. But here's what's crucial. The approval criteria that I shared with you, they can change that without warning, and they have. The banking industry, it shifts really fast these days and what works today might not work tomorrow. So if you're serious about securing funding, whether for your business or your investment real estate, grab that little guide below that I put together

and review it while these strategies are still valid. Traditional lending rules have shifted dramatically, but knowing these insider strategies puts you ahead, ensuring that your business or your investments, they don't stall due to outdated bank policy. I'll see you next time. Take care. And that wraps up the epic show. If you found this episode valuable, who else do you know that might too? There's a really good chance you know someone else who would. And when their name comes to mind, please share it with them and ask them to click the subscribe

button when they get here and I'll take great care of them. God loves you and so do I. Health, peace, blessings, and success to you. I'm Matt Terrio. Living the dream. Yeah, yeah, we got the cash flow You didn't know home for us, we got the cash flow This podcast is a part of the C-suite Radio Network

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