As the year comes to a close, perhaps some of us are thinking of buying a new home in the next twelve months. Jim McKinley from Money With Jim, has some ideas on how to get your debit and credit into shape in advance of this big acquisition.
Have your sights set on a new home purchase? If you’ll be moving in the next six to 12 months, two of the most important things that you can do is getting your debt under control and understanding conventional loan requirements. Whether you have student loans, credit cards, or a car loan, anyone can improve their financial standing by using strategies that work best for their unique situation.
Explore five effective debt-management tips — specifically tailored to prospective home buyers.
Start by creating a savings goal
While it is definitely important to work on paying down all existing debts, it is equally worthwhile to prevent taking on more debt in the future. With the average mortgage loan balance now sitting at $208,185, it is wise to do everything in your power to minimize what you’ll owe.
What’s the best way to achieve this? Start by creating a savings goal. This goal should be based on several factors. First, consider how much you’ve already saved. If you’ve stashed away more than what is required for a minimum down payment, you won’t have as much work to do as those who do not have anything saved. Also, research how much homes are currently selling for in your desired neighborhood. This will help you accurately determine how much you need to save for your down payment.
Do not take on any additional debt
During the home-buying process, it is critical that you do not take on any new debt. This includes everything from new credit cards, to installment loans, to a new car purchase. During the mortgage underwriting process, your finances are scrutinized. If you apply for a new loan or line of credit, the entire process can be delayed. In some cases, you even risk being denied for a mortgage if you take on too much debt. To be safe, don’t apply for anything until after closing.
Pay all credit card balances down until they are under 30 percent of your credit limit
The Motley Fool notes that one major factor in determining your credit score is your debt-to-credit ratio. Having a revolving balance that exceeds 30 percent of your credit card’s total limit will negatively impact your score. If you have multiple cards where this is the case, your credit score can decrease further.
When looking to optimize the few months you have before applying for a mortgage loan, aim to pay all your credit card balances below this 30 percent threshold. Doing so can raise your credit score substantially, according to myFICO, which can lead to lower mortgage loan rates. Also, if your credit score needs improvement, this single strategy can be the difference between your loan being approved or denied.
Build a rainy-day fund for emergency expenses
Among the top causes of debt is not having sufficient savings for emergency expenses. From flat tires, to plumbing issues, to emergency vet visits, costs can add up quickly. To avoid taking on additional debt, and to have the ability to cover unexpected costs out of pocket, aim to save at least $1,000. And even if nothing goes wrong for a while, resist the urge to dip into your savings for other reasons.
Make all your payments on time
Finally, all people looking to buy a home within the next year should be extra diligent in paying their bills on time. Just one late payment (exceeding 30 or more days) can lower your credit score substantially. Ensure that you are on time with all payments by setting your bills for auto-pay, or by creating reminders on your phone.
Jim McKinley is a retired banker with almost 30 years of experience in the financial world. He created Money with Jim to share his advice and other resources on a variety of financial topics.