The difference between money advice & mortgage advice.
If you’ve been with me for a while, you’ve probably noticed that I have two main themes that I touch on all the time. Money advice, and home finance advice- and they’re not always the same! Strategizing about how to acquire a home loan is not always the same as strategizing on how to save, cash flow, etc. So today I want to talk about the difference between the two.
The advice I give you about money is about the overall health of your financial picture. It often has to do with cash flow and how to grow your assets via the compound effect.
The advice I give you for qualifying for a home loan is very specifically about getting a home loan- which means how to optimize your terms, get the best interest rates and lower your fees.
There are a LOT of people giving financial advice. One of my personal all time favorite money gurus is Dave Ramsey. But his amazing advice on how to live debt free is not good advice for someone seeking to buy a house with a mortgage. They’re two different things and it’s important to understand why so you can make the best choices for you. If you were to follow advice on debt consolidation and going debt free while also planning to buy a home with a mortgage, you’re likely going to run into all kinds of hurdles and higher costs for your loan because your credit history will tell a story that is not favorable in the home loan process.
Of the thousands and thousands of home loan applications I’ve seen over the years, I’ve boiled down what I think the ideal loan application looks like:
- -Buying a primary residence
- -Credit score of 740 or above
- -3-5% Down payment funds
- -Cash to cover closing costs
- -Cash to cover at least two months of mortgage payments
- -Two year (documented) employment history in the same line of work
Now, before you start worrying that this might not be you, let me tell you how rare it is that I see an application like this! Seriously, I’ve been in mortgages since 2002, and of those many many thousands of applications that I’ve seen, the number of applications that are as “perfect” as this is in the low hundreds… and that does not mean that anyone person’s scenario is better or worse, it just means that people’s lives (and finances) are very individual, and not many people fit into this ideal bracket.
So what does this mean for you if you want to buy a house, but don’t check off every mark listed above? It just means that you should talk to a loan officer as early in the process as possible… LONG before you get your heart set on a house. Talking to your loan officer early will let you make smart choices about your money and credit leading up to a home purchase so that you can get terms that are most favorable to you. The advice you loan officer gives you regarding buying a house is going to very specifically be about qualifying for the best home loan possible. Awesome, right? Right.
But what good money advice could be bad mortgage advice?
Seems like any money advice would be helpful when trying to get a mortgage, right? Nope… not right. There’s actually advice that can really throw a wrench in how you qualify for a home loan. And yes, you hear some of this advice from me! But remember, when you come to this channel, sometimes I’m giving you mortgage advice, and sometimes I’m giving you money advice. So here are the things you should be cautious about when your immediate financial goal is to qualify for a home loan:
1- Paying off and closing credit accounts. Seems counterintuitive, BUT, the algorithms that look to see if you are a good risk for a home loan want to see that you consistently pay on revolving credit. When you pay off and close an account, that actually has a negative effect on your credit. I’m not saying you should keep credit cards forever, but paying them off and closing accounts in anticipation of acquiring a home loan in the near future is a bad plan.
In life- yes, pay off your debt! When qualifying for a home loan, you want to show the longest credit history possible, with on-time payments, and ideally you want your balance to be less than 30% of your available credit.
2- Multiple Streams of Income. Side hustles. I love a good side hustle. I preach this all the time. But when it comes to your home loan, large cash deposits without documentation are problematic. Not only can we not rely on them as steady income to qualify you, if you’re not documenting that income to the ole IRS, you’ve got all kinds of other headaches waiting for you. So hustle away, but if it’s going to be money that you rely on to pay your mortgage, make SURE that it is documented, invoiced, reported, etc.
3- Job changes. I get it- sometimes you need to negotiate a higher salary to be able to afford a home. I even told you to do it! But that advice comes with the caveat that you need time in that new job or that new salary to prove that it’s long term. This is why talking with someone about what you need to do to qualify LONG BEFORE you start house shopping is so important. If you change jobs before buying a home, it might be awesome for your overall financial situation, but it might actually be terrible timing for your home loan.
So the moral of the story here? Take into consideration what your plans are for the next year (or more) when implementing financial advice! If a home purchase is on the horizon, do the things that will get you the most favorable loan terms so that when it comes to your LONG term financial goals, your mortgage isn’t holding you back 🙂