Bad habits to let go of if you want to buy a house
- Using your credit card irresponsibly
Resist the urge to overspend, max out your plastic, or acquire multiple credit cards. These habits are red flags to mortgage lenders. Instead, keep the following tips in mind:
- Set up auto-draft payments or schedule reminders to avoid missed or late payments
- Prioritize paying off cards that are about to max out
- Spend within your means by treating your credit card like a debit card
- Limit your credit accounts to just one or two
- Avoid canceling old credit accounts, especially if you have a positive history of complete and on-time payments
- Not paying your debt on time or in full
Be wary of missing payment deadlines. For credit cards, interest is added to your outstanding balance (at a prime rate of 4.25%) for each day that it remains unpaid. This means your debt increases over time, becoming even a larger challenge to pay off.
In addition, missed payments can adversely impact your credit score. Most lenders refer to your FICO score to assess your creditworthiness. Your payment history comprises the largest portion (35%) of your credit score.
- Not sticking to a budget
If you’re set on buying a home, know how to manage your income. The 50/20/30 rule is a simple but effective guideline that can put structure to your budgeting. This system splits your monthly income into the following categories:
- 50% for fixed costs
This covers essential living expenses like rent/mortgage, utilities, and subscriptions (gym, Netflix, news sites, etc.)
- 20% for financial goals
Apportion your income for loan payments, emergency and retirement funds, or a future big-ticket spend like the down payment on a house
- 30% for flexible spending
Consider this your disposable income for expenses that vary each month like shopping, eating out, groceries, gas, hobbies, and entertainment
- 50% for fixed costs
- Switching jobs
Pay attention to what your job history suggests to a creditor. Lenders favor applicants who have a steady stream of income to support a long-term mortgage.
Frequent job-hopping does not encourage confidence among lenders. Even if you’re switching to a new employer in the same field with the same (or even higher) salary, lenders will hesitate to consider your income stable if you’ve been in your new job for less than six months.
Freelancers and commission-based professionals are still eligible to apply but may face stricter mortgage terms due to the unpredictability of their income.
- Underestimating your student loans
Student loans impact your debt-to-income ratio, so don’t neglect your payments. Mounting debt and an unfavorable payment history will adversely affect your creditworthiness.
To manage your student loans, financial planners recommend these options:
- Set up auto-debit payment terms through your online banking account
- Ask your employer about student loan repayment benefits
- Authorize your lender to withdraw your loan payment from your bank account every month
- Refinance your payment terms at a lower interest rate
- Pay off the debt in full if you have enough savings
To learn more about financing your home, read this.
For inquiries on Central Florida properties, call us at 407.540.7040 or send an email to Chris(at)ChrisQuarles(dotted)com.