It’s never too early to start planning for the future. This is especially true for future homeowners. Even if you have never thought about owning a home or think that you may never want to, it’s smart to plan ahead just in case. Trust us — taking care with your finances now has the potential to greatly impact your ability to achieve your goals in the years ahead. Here are some tips we wish we would have known.
Credit Card Utilization
Lenders will want to see that you are not a financial risk when it comes to credit utilization. Generally, they’ll want to see that you are not near your maximum credit limits; it is suggested that a healthy credit card utilization is less than 35 percent of your total credit limit for all of your credit cards.
While it’s very important that you establish lines of credit in order to build credit towards purchasing a home, buying a car, etc., it’s also imperative that you are able to prove to lenders that you are responsible with your credit and will pay them on time. Keeping your credit utilization low now will help you prove to lenders that you are a worthwhile investment when you apply for a home loan in the future.
Home loan lenders look at what’s called your "front" and "back-end" debt-to-income ratios. Your front-end ratio tells you what you can afford in mortgage-related payments each month, which should not exceed 28 percent. To figure out your front-end ratio, multiply your annual salary by .28, and then divide it by 12. Your back-end ratio is your total debt-to-income ratio, including all of your debt, such as a mortgage, credit card bills, student loans, car loans, child support, etc. The maximum allowable total debt-to-income ratio is 36 percent.
One way to keep your debt-to-income ratio low and ensure that you won’t need to over-utilize your credit is to build savings. Life is going to happen, and accidents and unexpected necessities are a part of life. Electronics die, cars break down, people get sick, pets need to be taken to the vet and family members show up unexpected. No matter how much you plan ahead, you are inevitably going to need more cash than you have at some point. Building up a good nest egg of savings will ensure that you have it when you need it and don’t continue to add to your debt.
Credit Scores/Resolving Credit Issues
A low credit score can keep you from acquiring a loan for a home, a car, furniture and other large items that you will want throughout your life. While you will want to start establishing lines of credit to start building good credit, you also want to be very careful about how you use credit. Credit scores can make or break you. They can also influence the amount of interest you will receive and how large your down payment will be. Also, blemishes on your credit history can negatively influence your score for years, even if you have resolved them. Taking care to clear up any negative marks against you now will help immensely in the future. You can monitor your score for free at creditkarma.com.