The Difference Between Money Advice and Mortgage Advice
If you’ve noticed, I offer two main types of advice in my blog posts: money advice and home loan advice. While the two may intersect and overlap, they’re not always the same thing! In fact, there’s a distinct difference between the two. In this blog post, I will be walking you through the distinctions between general financial advice and mortgage advice.
While the advice I give regarding money and finances as a whole has to do with cash flow and how to grow your assets, the advice I give about qualifying for a home loan is very specific and extremely detailed. There are many different factors that go into specific advice regarding qualifying for a mortgage, such as optimizing your interest, getting better interest rates, and lowering any fees. There’s a ton of financial advice out there about living debt-free and consolidating your debt. However, any advice on living debt-free may not be the most optimal advice for someone looking to purchase a home. If you were looking to go debt-free and take out a home loan at the same time, you’ll run into some unfavorable situations due to lack of credit history.
I’ve seen thousands of home loan applications over the years, each with different specifications and criteria that have made it unique. Out of all of those applications, I’ve found what I believe the ideal home loan application looks like:
- Buying a primary residence
- 740+ credit score
- 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
Before you start panicking and insisting that this can’t be you and that you won’t be approved for a loan because your situation does not look exactly like this, take a step back and breathe. It is exceedingly rare that I see an application that checks every single one of these boxes. I’ve been a home loan officer for many years, and I’ve seen a small amount of applications that fit all of this criteria. This does not mean that any one person’s scenario is better or worse, it just means that peoples’ financial situations are very individual and personal, and not many people fit perfectly into this bracket.
I know what you’re probably thinking – what good money advice could be bad mortgage advice? It seems like any money advice would be helpful for getting a mortgage, right? Unfortunately, you’d be wrong. There actually is sound financial advice that can in turn make it more difficult for you to qualify for a home loan.
Here are some things that you should be cautious of when your immediate goal is to apply for a home loan:
- Paying off and closing credit accounts. While this seems counterintuitive, 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. Paying off and closing an account can actually have a negative effect on your credit. This isn’t to say that you should keep your credit cards forever – but paying them off and closing accounts in anticipation of being approved for a home loan is not a sound plan. Paying off your debt isn’t a bad thing; however, when you’re in the process of qualifying for a home loan, you want to show a long credit history and you ideally want your balance to be less than 30% of your available credit.
- Create multiple streams of income. Side hustles are a great way to get more money to put towards your mortgage. However – I cannot stress this enough – when it comes to your home loan, large cash deposits without documentation are problematic. Not only can these deposits not be relied on as stable income to qualify you, you can get into deep trouble if you’re not reporting this source of income to the IRS. So, hustle away – but if it’s money that will be used to pay your mortgage or other loans, be sure to report it to the IRS!
- Job changes. This really is a Catch 22 of sorts – sometimes, you may need to get a better job or negotiate better pay in order to be able to afford your home loan. However, the caveat to this is that you need to prove that the job is long term in order to secure the home loan. Thus, getting a new job could be awesome for your financial situation, but terrible for you getting approved for a home loan.
When it comes to implementing financial advice, consider your plans for the next year and whether or not they involve getting approved for a mortgage. If a home purchase is on the horizon, implement the advice that will help you the most in getting approved for your loan. This way, when it comes to your long-term financial goals, your mortgage isn’t holding you back!
