Happy New Year!
To start off your new year right, we compiled a list of four New Year’s resolutions to jot down if you plan to buy a home within the next 12 to 24 months. These resolutions will help prepare your finances for your next (or first) mortgage.
Resolution #1: Keep Your Credit Utilization as Low as It Can Go
The end of each year is a season for giving so the first item on your 2018 To-Do list may be catching up on bills and paying off lingering holiday debt. Putting a dent in your credit card debt can improve the credit utilization factor of your credit score. Credit utilization is a ratio that compares your total credit card balances to your credit limits.
Ideally, you want to be using less than 30 percent of your credit card limits. Reducing your credit card balances this year may bump up your score several points because credit utilization is the second most influential factor used to calculate your FICO score.
Of course, paying your bills on time is the most influential factor so be mindful of your due dates as well. Another benefit of repaying debt is that it can improve your debt-to-income ratio which is used by lenders to determine how much home you can afford.
Resolution #2: Create a Household Savings Plan
The amount of savings you’ll need for a down payment will depend on the type of mortgage product that you choose. Expect to bring at least 3.5 percent in cash for the down payment unless you qualify for a VA loan, USDA loan, or another low down payment program.
Lenders like to see that you have cash reserves in addition to the necessary down payment funds. Having extra cash shows you’re a financially stable prospective borrower.
Decide on a total sum you want to save this year and divide this number by 12 months. Resolve to start consistently saving each month from the beginning of 2018. Using this approach can help you amass the down payment you need for the home you desire.
Resolution #3: Stay Organized If You’re Self-Employed
Self-employed workers need to pay extra close attention to personal and business finances. Keep your finances separate. Lenders will review your tax returns for proof of income when you apply for a mortgage because you don’t have W-2s.
Be mindful of the tax deductions that you’re taking for the next year or two. Deductions can reduce your taxable income and make it harder to qualify for a mortgage.
You may want to invest in a tax professional (if you don’t have one already) or financial planner this year since self-employment can make buying a home slightly more cumbersome.
Resolution #4: Stay Committed to Your Job
Lastly, homebuyers who work for an employer should resolve to stick around in their current position for a while. Certain changes can impact your mortgage approval negatively.
Making lateral career moves, switching your pay structure, changing your employee status, or switching industries are possible red flags for lenders. It’s better to be safe than frustrated after learning your employment situation will make it challenging for you to obtain a mortgage.
The new year brings a new opportunity to improve your financial outlook ahead of a home purchase.
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