Financial Fitness Bootcamp: Shape Up Your Finances
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Financial Fitness Bootcamp: Shape Up Your Finances
Spring is almost here – we can feel it in the air! That means it’s also homebuying season! If you’re one of the millions of people considering buying a home this spring or summer, now is the perfect time to brush up on your financial fitness and ensure you show you’re a capable buyer!
This financial fitness bootcamp routine will help you put your right foot forward and help you reach your goals of homeownership.
Why You Should Shape up Your Finances Before Applying for a Mortgage
Qualifying for a mortgage means proving you can afford the loan and having a solid credit history that proves you make your payments on time. The better your qualifications, the more options you’ll have for mortgage financing, including better rates and terms.
It’s a good idea to work on your finances several months before applying for a mortgage to ensure you qualify for the best mortgage programs.
What do Lenders Look for in your Finances?
Lenders want to know that you can afford the mortgage along with any other debts you currently have. They also want to know that you have a history of paying your debts on time and not defaulting.
They also look for solid savings or investments, proving that you know how to handle your finances and don’t spread yourself too thin.
Each loan program and lender has different qualifying requirements for specific programs, but the bottom line remains the same – you must prove you can handle another loan.
If that makes you nervous, keep reading to learn the perfect finance fitness routine to help you get the best rates and terms.
Your Finance Fitness Routine
Your financial fitness routine should be just like your health fitness routine—it’s something you do regularly. Ignoring your finances only leads to financial strain, making qualifying for a mortgage more challenging.
Here’s the ideal finance fitness routine to get you going.
Check your Credit
Your first step should be to check your credit. Everyone gets free access weekly, so use that to your advantage and get to know your credit history. Lenders like it when you have high credit scores, usually 680 or higher. This doesn’t mean you can’t get approved with a lower credit score, but the better your credit history is, the better rates and terms you’ll get.
AnnualCreditReport.com doesn’t provide credit scores, but you may see a mock-up of your credit scores through partnerships with your bank or credit card. Ask your financial institutions if they offer free credit score tracking so you can get an idea of what your credit history does to your score.
Areas to focus on include:
- Late payments (bring all accounts current)
- Collections or chargeoffs (handle them accordingly and keep proof of payment)
- Fraudulent or inaccurate information (dispute this with the credit bureaus to get it corrected)
- High credit balances (pay them down)
The key is to have a solid payment history, a small amount of debt, and no active collections or chargeoffs. Keep in mind that any changes you make will take a few months to reflect on your credit score. It’s not an instant change, but a consistent effort to have a solid credit history will pay off in the end.
Create a Budget
Create a budget that works after getting familiar with your credit history and score. Your budget should focus on:
- Housing
- Utilities
- Food
- Insurance
- Medical needs
- Credit card payments
- Personal loans
- Auto loans
- Savings
The key is to have a budget that leaves room for a new mortgage payment. Focus on your current housing payment (even if it’s rent), and decide how much ‘payment shock’ or increase in housing costs you can afford.
It’s a good idea to leave room for the unexpected. The more you can save and put away for a rainy day, the easier it is to qualify for a mortgage.
Make your Payments on Time
Making your debt payments on time is essential when you’re considering applying for a mortgage. You want to show that you’re responsible with your finances. On-time payments help increase your credit score and your chances of mortgage approval.
You avoid unnecessary interest charges and late fees when you make your payments on time. If you slip up and miss a payment, be sure you make it before the loan becomes 30 days past due, as that will damage your credit score.
If you can’t make your payments on time, revisit your budget and see what you can change to make them easier to afford.
Pay your Debts Down
Your credit utilization tells lenders how much of your credit lines you have outstanding. Think of this as a measurement of your financial responsibility. The more debt you have outstanding, the riskier you are to lenders.
So, this part of your financial fitness routine requires you to pay down those high credit balances and keep them at that low balance.
Save as Much as Possible
While you make your payments on time, keep your credit balances down, and stick to a good budget, it’s also important to save money!
Saving money ensures you have enough for the required down payment, to cover the closing costs, and to set aside money for emergencies. Owning a house is a big responsibility, and if something goes wrong, you must be able to afford to fix it, so saving is essential.
The Perfect Financial Diet
Now that you know what your regular financial fitness routine should include, let’s focus on the perfect financial diet. This diet focuses on what NOT to do when you’re ready to buy a house.
Avoid Big Purchases
You should avoid big purchases when considering a house for many reasons.
- Hurts your credit score: When you make a large purchase on credit, it increases your credit utilization rate. This decreases your credit score and limits your options when you apply for a mortgage.
- Complicates your budget: You already created a budget as a part of your financial fitness routine, but charging a large purchase increases your monthly payments and disrupts your budget.
- Decreases your savings: If you pay cash for a large purchase, your credit score remains unharmed, but you deplete your savings, which could make it more challenging to get approved for a mortgage.
Don’t Apply for New Credit
Applying for new credit within the months leading up to a home purchase can hurt your chances. New credit lowers your credit score and shows lenders you have a new debt. This affects your debt-to-income ratio and how much lenders can lend you.
Avoid applying for new credit for 6 to 12 months before you apply for a mortgage. If you need new credit within that timeframe, be ready to explain the reasons to your lender.
Don’t Close Old Accounts
It may be tempting to close old accounts, especially credit cards, after paying them fully, but don’t. Your credit age is the average of all your credit accounts. If you close an account, your average credit age is younger, which may make it more challenging to qualify for mortgage financing.
Don’t Change Jobs
When you apply for a mortgage, you’re applying based on your current factors. Think of it like a snapshot of your life. If you change jobs, that upsets the entire process. Your income will differ, and your employment history will be less stable than if you stayed at your current job. To make it easier, try avoiding changing jobs until after closing on your mortgage.
How Compensating Factors Can Help
In any process in life, there will be ups and downs. No one has the ‘perfect’ mortgagee application, but fortunately, lenders can consider compensating factors.
Just like you compensate at the gym when you have limitations, you can do the same with your financial fitness routine.
For example, if you have a credit score on the lower end, consider making a much larger down payment than is required to ‘compensate’ for the lower credit score.
Another example is having a fantastic credit score but relatively new employment. One ‘good factor’ can offset a ‘bad factor,’ enabling you to get approved at the desired rates and terms.
Final Thoughts
The key factor to any financial fitness bootcamp is consistency. Whether you’re applying for a mortgage in a month, six months, or a few years, the more consistent you are with your finances, the better your chances of getting a great mortgage approval.
The good news is that no one has to be perfect; you just need good factors to offset the ‘iffy’ ones and a commitment to consistently work on your finances to provide lenders with a solid application.
