I am going to disclose right up front that I am not a financial planner or financial expert. But in helping many of my clients prepare to search for a home I often find myself using my many years of financial analyst and corporate finance experience to guide them.
It is not uncommon for me to share some financial guidance with my first time homebuyers. I like to advise them that too big of house payment can leave you with too little money for other goals, such as retirement funds, college savings, vacations, etc. They laugh at my impromptu circle drawings breaking down into pie shapes various life expenses but they usually start listening intently when I say that as a general rule of thumb the experts say that no more than 28% of their gross monthly income should go toward house related debt. Seeing the numbers on paper really seem to make it click for them. And…if I really want to get their attention I tell them how much I just spent on college tuition for my two kids. That number always seems to get the reaction of making mouths drop in shock. But it helps them to realize that financial planning is crucial for financial success.
And recently with so many mortgage lenders tightening their standards for mortgage loans many people have to do debt reduction and credit repair prior to getting approved for a loan. Sometimes it only takes an unexpected crisis or a small stumble to wind up deep in debt prohibiting them from being able to get a mortgage loan. It has been very rewarding to see mortgage loan officers offer guidance to potential clients on how to clean up their debt and repair their credit. And it is not uncommon to see those very same people come back months later ready to buy a house. They all say they just needed someone to help point them in the right direction.
I recently polled my lender contacts and came up with list of a few steps to help begin the road to debt reduction and improving your financial situation:
1. SET A MONTHLY BUDGET AND PAY YOURSELF FIRST. This does not mean buying that great new gadget. It means adding money to an emergency savings fund. If you treat saving money like a monthly bill it becomes a habit.
2. TRACK EXPENSES DAILY. Write down EVERYTHING you spend. It is very eye opening when you see all the money that is spent on little items such as that daily morning Starbucks, eating lunch out or getting our nails done.
3. CUT SPENDING. Stop buying. Be creative in finding ways to trim your spending. This is hard for most of us. We have become a “want” not “need” culture. Look at options for downsizing in all the different aspects of your life.
4. SET GOALS. Give yourself timeframes and checkpoints to get your final financial goal destination. Enlist the help of friends and family if you need a motivation.
5. PAYOFF HIGH INTEREST LOANS. Paying off the higher interest loans first makes sense because you are paying more $$$ towards interest. Once those high interest loans are paid off you have increased your monthly cash flow amount.
6. IF NEEDED FIND EXTRA WORK. TAKE A SECOND JOB. Increasing income and cutting expenses really helps to work on both ends of the debt reduction equation. I had a client who took a part-time seasonal job. She banked the extra funds from that second job for her down-payment.
7. PAY BILLS ON TIME. Use online services to pay bills. Setting up monthly online payments ensures bills are paid on time. Eliminates the cycle of late fees. Eliminating late fees helps to raise credit limits.
8. CHECK AND MONITOR YOUR CREDIT SCORE. FIX ANY CREDIT REPORT ERRORS. Lenders say to strive for a credit score of at least 720 to 740 to get better rates. Check your credit report on a regular basis. If errors are found write letters to the credit bureau agencies providing proof you are right about the errors. Proving you are right can be a long and tedious process but it can help to improve your credit score. You can get a free credit report by going to AnnualCreditReport.com.
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