5 Money Management Messes to Clean Up Before Buying a Home
High Debt Levels
Most credit cards allow you transfer balances for no fee. Professor Michael Taillard – a PhD in economics – suggests, “Pay off as much debt as possible and consolidate the number of credit cards you have by paying off the others using your lowest-rate card.” After consolidation, cut up your highest-interest cards and pay down your balance as quickly as possible. This means avoiding more credit card debt – you can use a debit card for convenience without increasing your debt. Don't forget long-term items like student loans. If possible, increase the size of your monthly payments above the minimum amounts due to demonstrate your determination to pay down this debt.
No Credit History
It’s a paradox – you avoid debt, so you have no credit history, and because of it banks hesitate to extend you a mortgage. Your first step is to obtain one or more credit cards. Taillard advises: “If you have the time, start “card-grinding” – charging everything to your credit cards and paying them first thing next month.” You might also open charge accounts at major department stores and add overdraft protection – essentially a credit line – to your checking account. Your exemplary payment habits will help you establish a respectable credit score quickly.
If you experienced a personal bankruptcy, “you will have to let a few years pass before applying for a mortgage,” Taillard says. The court will send you a court order called the “discharge of debtor” – this is a valuable credential you can use when mortgage shopping. You should also be able to describe the circumstances that forced you into bankruptcy and what steps you’ve taken to prevent those circumstances from occurring again. Check your credit report to ensure it marks all previously delinquent accounts as “discharged in bankruptcy” and show zero balances.
Credit Report Errors
Speaking of credit reports, even the best credit agencies can carry inaccurate information about you in their records. Taillard advises: “Make sure your credit reports are accurate at all three of the major bureaus." You can order free copies of your credit reports once every 12 months from the Annual Credit Report website. Unfortunately, you will have to pay to receive your actual credit scores. You will want to ensure that all information is correct and up-to-date. Circle each disputed item on your report and attach a full explanation of why it is wrong or incomplete. You will need to provide documentary evidence for your claims, but always send copies, not originals. Agency rules permit you to remove inactive accounts after seven years.
Low Liquid Assets
Your assets and investments may leave you short of cash. Taillard cautions, “When buying housing, don’t forget to keep a higher ratio of your other assets solvent for a rainy day. To keep the fridge on, the toilet running and the repo man at bay, try to keep at least a few months’ worth of debt coverage in short-term, liquid investments, such as Treasury Bonds, and out of your retirement accounts.” New homeowners are often surprised by the ongoing costs of maintaining a home. Initially, you could keep enough liquid assets to pay home-related expenses of at least a few hundred dollars a month until you get a better feel for your actual expenditures.