Avoid these Financial Traps Part 1
The New Year is quickly approaching and with the New Year comes people’s New Year resolutions. One common resolution or goal that people have in the New Year is to do better with their finances whether that means budgeting, saving more, getting out of debt, investing, etc., but there are some things to avoid when doing this.
I must start by saying that after having been in debt, having gotten out of debt, and now saving to buy a home over the past few years I have really struggled with debt and what good debt is versus bad debt. I have studied Scripture and found that there is not one good thing that God has to say about debt. With that said this is completely counter-cultural and some of these things may not seem right to you, but stick in there and please feel free to ask questions. Your dialogue on a post could very well help you to understand better as well as someone else.
One of the first things to avoid is the appeal of credit and your credit report. A credit report is a report that is compiled based upon your debt history (how you pay off your debt), how much debt you have, how long you have been in debt, how much new debt you have, and finally what type of debt you have. A credit report is more accurately a debt report card. If you have done good with debt you get a better score. If you have not done well with debt or if you have too much debt you will have a worse score. If you have never had debt in your life, have never taken out credit for anything then you have should have no credit history, unless a non-credit agency has reported something for some reason. If you have had debt and paid it all off then eventually you will have a zero credit score.
Knowing all of this you may be asking yourself why I recommend avoiding the appeal of credit and your credit report. You may be thinking to yourself, “but don’t I need a good credit score?” The answer is yes and no. A good credit score can be beneficial when buying a house and in some situations when trying to rent a place, but the reality is that you will be much better off in the long run if you dump your debt and start saving. Beware though that your credit score will suffer as you do this, but do not fear because eventually it will drop to zero.
“How do I buy a house without a credit score?” Would it surprise you to know that FICO, or the credit score, was not always a thing? There have been other credit bureau reports in the past, but FICO has stuck and has evolved to be the go to method for determining whether or not to loan someone money, but it is not the only way. Banks can still do manual underwriting, if they are willing. What this means is that they will actually look at your ability to pay and your payment history of things such as phone bills, utilities, rent, etc. and they will use that information to determine how much risk there is to loan you the amount of money that you are asking for.
If you had the option of loaning money to someone who had a great credit score, because of their debt history, or someone with a zero credit score, because they are debt free who would you rather loan money to? It’s true that manual underwriting is more work than pulling a credit report, but there is typically less risk in borrowing money to someone who has shown that they pay their bills on time and do not have debt.
If you are serious about changing the course of your financial future then dumping your debt should be a main priority for you. This will mean that your credit score will fluctuate and will eventually fall off the map, but that will not preclude you from being able to take out a mortgage if you decide that is the option you want to go with. You may have to check with a few banks to find one that will work with you, but typically local banks will do this, do not be discouraged if one of them tells you know, just go somewhere else and ask them.
If you decide to buy a house by borrowing there are some things that you should do that will help set you up for success. First you should have an emergency fund of 3-6 months of expenses saved up, you should be debt free, you should save up at least a 20% down payment to avoid having to pay PMI (Private Mortgage Insurance), and lastly your term should be 15 years or less on a fixed rate mortgage. When you buy a house without having prepared properly first you set yourself up for hardship and possibly failure. By adhering to these steps you will be able to take out a mortgage with less risk and stress and it will help keep you moving toward financial freedom. The goal should be to be completely debt free so that all of your money is working for you rather than against you.
At the current rates of roughly 3.7% it would cost you $91,677 to buy a $150,000 house with no money down on a 30 year term with an additional $6,875 paid to PMI based upon a 0.5% PMI rate. At the current rate of roughly 3.4% for a 15 year fixed rate mortgage it would cost you roughly $33,356 for the loan with 20% down. That is a big difference and while you may not be able to buy as big of a house and you may have to keep renting for another year or two you will save BIG and will be in a much better financial situation.
If you found this information useful please share it and be sure to follow HigherPowerLiving.com to stay on top of the latest information that is posted. Also, please feel free to comment and ask questions. My goal is to help people and questions help bring clarity and can help not only you, but also others. If you would like some help contact me. Also be sure to keep your eye out for the next post of financial traps to avoid, I will be talking about debt consolidation next and why it may not be your best option.
Have a blessed day,