For anyone who has ever thought about getting a mortgage, saving money and getting ahead financially, this is for you. The following is what you should have for the most optimal financial profile.
To purchase or refinance a house you need to have a blend of cash, credit and income. You would want your income to be as high as possible, have a mortgage in your name which helps with tax deductions as well as your credit score, saving money every month and have additional funds in the bank while planning for retirement. Creating and adhering to a monthly household budget would support this scenario. This type of scenario, if followed, will lead to wealth creation and financial opportunities in the future.
You ideally want your income to be three to four times higher than your fixed monthly expenses including your total monthly mortgage payment and any other consumer debt you may carry. The reason for this is, if your income is so high you must remember part of your income is going to be going to taxes before any discretionary spending. Paying off debts and savings comes from your net income. Taxable income can be taxed as high as 50 percent.
For an example if your income is $15,000 per month, you’re only going to net about $7,500 of that money as about half goes towards federal taxes.
You want to pay all your bills on time. Do carry three or five credit cards that you use and pay in full every month. Don’t carry debt even if it is zero percent interest. Use your credit account to keep your utilization of credit low. Self-proclaimed financial gurus will tell you to carry debt, they are wrong. What people fail to realize is it’s not about the interest that you’re paying on the debt, it’s the payments which impact your choices of your cash.
For example, a credit card that has a $500 payment a month on it with a five percent special interest-rate, is worse than a credit card that has a 10 percent interest-rate and a payment at $200 per month. Why? It’s all about the payment. You want to be able to control where your monies go and not have it be pre-determined by a creditor. Most consumer debts are not tax-deductible and they impede your ability to save money.
Assets- this goes back to savings as you need to have the high income to be more credit worthy. The income creates the platform for you to save so your income is not handcuffed by debt.
You should be contributing to a 401(k) through your employer. If you are not yet started, do so right now. Setting up a 401(k) will allow your employer to sometimes even match whatever contribution you put in. You put in $50 they put in $50. Through the course of time this money will grow and accumulate giving you a choice and flexibility over your money and allowing you to use this money for buying a home or other venture.
Ideal example scenario- (it’s not the numbers that should be the most important, it’s the relationship between the numbers that are the most important).
$20,000 per month income
800 Credit score
$50/month in credit cards
$80 in the bank
$40k in 401k
$3,000 new mortgage payment
What do you notice about this financial profile? The relationship between the debt and the income is massive. The bigger your relationship is between your income and your debts the more you will receive each month giving you choice and control over your budget.
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Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.