Resolutions for 2016: 3 to keep and 3 to break
If you’re looking to buy a home in 2016, there are a lot of possible, common financial resolutions. The trouble is they aren’t all as good as they sound. In fact, some may even hurt your homebuying prospects.Know the market. Picking a city or neighborhood to buy a home, settle down, raise a family in is one of the first steps for homebuyers. So it is critical to research the cities or neighborhoods where you want to buy. Look, for example, at median home prices, the prices of recent sales, inventory of homes for sale, and how quickly places are selling. Your research should go beyond housing data to look at schools data, commute times, access to parks and open space, and — with a little online digging — you can even find the most pet-friendly US cities. Get that 20% down payment. Don’t kill yourself. Yes, if you can save for a 20% cash down payment, there are advantages. But there are alternatives — including mortgages for as little as 3% down, and even zero-down mortgages for qualified borrowers through the Veterans Administration and U.S. Department of Agriculture. Rather than resolving to save for a 20% down payment, why not resolve to “get smart about down payments“? Learn the ins and outs of down payments and what options that may work or you. Talk to a mortgage banker to fully understand the pros and cons of different scenarios. File taxes early. Having current financial information handy can help make the mortgage application process go more smoothly and reduce stress. If your income jumped substantially in 2015 from the prior year, then it may be to your advantage to file your taxes early. That may allow your lender to use your 2015 income, verified by your tax return, to help preapprove you for a mortgage. Of course, it’s a good idea to consult with a tax professional on this, too. Close unused credit cards. A lot of people think a good step to tighten their financial belt is to close unused credit cards. Hold on! Closing credit card accounts may have an adverse impact on your credit score because it lowers your overall credit availability and the overall length of time you’ve had credit. Your credit score takes into account the average age of all your credit accounts. Generally, a longer credit history increases your credit score. So closing older accounts will lower the average length of your credit history. An alternative resolution might be, “Don’t open new credit accounts.” New accounts lower the average age of your credit accounts and may encourage you to take on more debt, which may make it more difficult to afford a mortgage in 2016. Get preapproved for a mortgage. If you are starting a serious search for a home, then get a preapproval letter from a mortgage lender. A preapproval gives you a good idea of what you can afford, based on how much you can put down and your income. It also gives a seller a good indication of what you can afford. By presenting a preapproval letter with an offer on a home, you are indicating to the seller that you are serious about buying a home, you have funds for the cash down payment, and that you are working with a lender that is willing (pending a final credit decision) to give you a mortgage for the home you are making an offer on. Raise your credit score. If you can do it, great. But focusing strictly on your credit score may be too narrow of a goal. The truth is your credit score is a reflection of something bigger, which is how well you manage credit. A better resolution is, “Be responsible with credit.” Start by understanding your credit score and your credit report. If you manage credit responsibly — including paying bills on time, borrowing just what you need, and avoiding opening unnecessary credit accounts, for example — you’ll be on the path to raising your credit score.
Have a Happy New Year, and best wishes if a new home is in your plans for 2016.