Are you more of the “everything in moderation” type than an “I’ll get to it someday” kind of person when it comes to your physical health?
In other words, you work out and eat a balanced diet, typically opting for a salad or roasted chicken over a burger and fries. (But of course, you’ve got to treat yo’self now and then!)
When it comes to the health of your finances, however, you might be more couch potato out of shape than downright buff, having just a tiny bit of money socked away for retirement. What’s more, you could be still paying down the mountain of credit card debt you accumulated earlier in life.
If you have a goal of owning a house — something that’s becoming increasing accessible to everyone — now’s a good time to boost your level of financial fitness. That’s because it’s not enough to simply save for a down payment and find a home that fits your budget. You need to ensure your credit quality is in peak condition.
But don’t worry, there’s no need to go on some crazy cleanse or sign-up for an intense boot camp to increase your chances of getting approved for a mortgage.
Start these mortgage warm-ups now and you’ll be in tip-top shape when it’s time to apply for your home loan. (Added bonus: You’ll save even more for your down payment!)
Steady as you go.
You’re not the only one who likes to see a regular paycheck. Consistent deposits into your bank account can be a boon to your overall financial fitness, making lenders happy, too.
When you submit a mortgage application, your lender wants to see that you’ve worked steadily for at least two to three years. They’ll also be looking for your salary to have increased (or at the very least, remained the same) during that time period.
If you’re a newly minted college grad looking to put down roots, don’t fret. Lenders will understand that you won’t have the same workplace continuity as a more seasoned employee, and they likely won’t hold it against you. Just have that diploma in hand to prove that you recently graduated; lenders will want to see documentation of your achievement.
Debt isn’t your BFF.
Simply put: If you’re not effectively managing the debt you’ve already accrued, chances are taking on even more debt could put you in a financial predicament.
When you apply for a mortgage, a lender will take a close look at your previous payment history to determine your creditworthiness for a loan. They’re looking to see if you’re responsible with your existing credit: Do you make your payments by their due dates? Do you maintain a low credit utilization ratio (the ratio of your used credit to your available credit)?
Fist bump if you can answer yes to both!
Stockpile like it’s Y2K.
Liquid assets are like big muscles. They’re the sign of being in good shape. Lenders look at how much you have accumulated in checking and savings accounts, vested parts of retirement accounts, bonds, and mutual funds to help understand your financial stability. The more you have saved, the better.
Depending on what kind of mortgage you are approved for, expect to use at least three percent — and up to 20 percent — of your liquid assets towards a down payment. Remember, the bigger the down payment, the less you’ll pay in interest over the lifespan of your home loan.
Play it safe.
You want to land the home of your dreams, not wake up to monthly mortgage payments that are a nightmare.
To figure out what size mortgage you can handle (a.k.a. how much money you can reasonably borrow — and pay back), a mortgage lender will calculate your debt-to-income ratio, or DTI. In most instances, a bank doesn’t want your DTI to exceed 43 percent, meaning that your mortgage costs and all other debt payments you may have should not account for more than 43 percent of your monthly income.
Depending upon the types of home loans they offer, some lenders might allow borrowers to have a higher DTI. (Others could even have lower DTI requirements.)
In most instances, if you apply for a loan that pushes your DTI over a lender’s threshold, you won’t be approved. Use our Home Affordability Calculator to figure out your DTI.
Know the score.
For physical health, you have the Body Mass Index, among other health stats, as one indicator of how physically fit you are. In mortgage lending, your credit score is used to help determine your financial health.
You can obtain a copy of your credit report for free each year from the three major credit-reporting bureaus (Equifax, Experian, and TransUnion) at AnnualCreditReport.com, but you might need to pay a fee for your actual credit scores. If your report contains any errors, reach out to each bureau to correct them. Mistakes could prevent you from landing the lowest interest rate possible on your mortgage or worse, cause your home application to be rejected.
If you have any less-than-desirable items (like missed or late payments) on your report, write to your bank and explain the situation. Despite what you may think, lenders can be understanding when it comes to temporary financial setbacks, like job loss or illness.
Getting in good physical shape takes hard work and discipline. The same goes for becoming financially fit – but the results are often well worth it!
What financial fitness tips do you have to share? Let us know in the comments below.