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Buying a House? How Fixing Your Credit First Can Save You $7,420

By Adam Funk Dec 9, 2015

Learn more about Adam on NerdWallet’s Ask an Advisor

“Hey Coach, I’m buying a house,” one of my clients recently told me. “I need to swing some money from the investment account to use for the down payment.” As a financial planner, this is a highly gratifying message to get.

When this client was referred to me a year and a half ago, he was 33 years old and had a good job making $50,000 a year. But he only had $5 in his savings account and he had terrible credit, a FICO score of 612. Thankfully his only debt was $1,200 he owed on his car and $430 on frivolous collection accounts he’d let slip through the cracks.

At the time, he wouldn’t have been able to buy a house with a conventional mortgage. Today he has qualified for a $100,000 mortgage and saved enough for an $11,000 down payment.

So how did we do it? We started off with a comprehensive financial plan. After spending time with him to learn about his specific situation, I spent about 10 hours reviewing all of his financial documents like tax returns, insurance policies and employment benefits. I ran calculations and did research to find ways he could cut costs, fix his credit and boost savings. A few weeks later we met again to go over his plan.

Bolster credit

For this client, it seemed he was paying a high premium for auto insurance, over $2,000 per year. The first thing I recommended we tackle was reviewing his credit to see if that might be a significant factor contributing to his high insurance premiums. We pulled his FICO report and learned his credit score (612).

To improve his credit, I developed a one-page game plan that consisted of paying off the collections and opening new lines of credit to create the optimal credit card portfolio for him. This would ensure he has access to enough credit while limiting his fraud risk and helping him build toward a great credit score.

Boost savings

Another weak spot was his lack of savings for emergencies and potential opportunities like buying a home, traveling or having a family. I recommended he open an investment account to excite him about planning for these important things he may want or need in the future.

 

Saving up for an emergency fund isn’t exactly fun, but thinking about all the things you’d like to do later in life can make saving and investing much more exciting and rewarding. With a bigger picture outlook he was able to identify ways he could save regularly, making deposits directly into his investment account before spending his paycheck.

 

Mortgage rate savings

When my client first came to me, he wouldn’t have been able to qualify for a conventional mortgage. Mortgage lenders evaluate borrowers on a number of different risk factors including their FICO scores and down payments. The higher your score and the more you put down, the better the mortgage rate you will qualify for from the lender. Because of his hard work to improve upon these two risk factors, my client was not only able to secure a loan, but he was also able to save thousands on the transaction.

By my calculations, raising his FICO score to 715 saved him $3,860 – the additional mortgage lender fees he would have incurred if his score was 620 (the minimum to qualify for many loans). Similarly, by putting 10% down he saved $3,560, what it would have cost him had he only been able to put the minimum 3% down. (These numbers are based on a point system many lenders use to evaluate risk and assess fees to the borrowers.)

If he’d had to pay this extra $7,420, it would have been in additional upfront closing costs or financed over the course of the loan in the form of a higher interest rate, which would result in a higher monthly payment. But fortunately, because of our work together, he avoided the extra costs.

I’m excited for the progress my client has made toward financial independence. His better standing opened up a great opportunity like buying a house – and it saved him thousands on the transaction. Even more importantly, I believe his success on this financial journey also helped strengthen his personal relationships. My client won’t be living alone in his new home – his girlfriend is helping him pick out the house!

This article was originally published on NerdWallet.com Dec 8, 2015



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