By Adam Funk
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 was 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. He also had little debt: just $1,200 he owed on his car and $430 in frivolous collection accounts he’d let slip through the cracks. But he only had $5 in his savings account and a FICO score of 612.
At the time, he wouldn’t have been able to buy a house with a conventional mortgage. Today, he’s qualified for a $100,000 mortgage and saved enough for an $11,000 down payment.
How did this happen? We started with a comprehensive financial plan. After talking with him about his specific situation, I spent about 10 hours reviewing all of his financial documents, including his tax returns, insurance policies and employment benefits. I ran calculations and researched ways he could cut costs, fix his credit and boost savings. A few weeks later, we met again to go over the plan.
When I reviewed my client’s financial situation, I noticed that he was paying a high premium for auto insurance, more than $2,000 per year. I suggested we first check his credit to see if that might be contributing to his premiums. When we pulled his FICO report, we learned that his credit score was 612.
To help him improve his credit, I developed a one-page game plan that consisted of paying off the collections and opening new lines of credit to make sure he had the best portfolio of credit cards for him. My strategy ensured that he could access enough credit, while limiting his fraud risk and giving him the tools to build a great credit score.
Boosting cash reserves
Another of my client’s weak spots was his lack of savings for emergencies or potential opportunities, such as buying a home, traveling or having a family. I recommended that he open an investment account to excite him about planning for these important things.
Saving for emergencies isn’t exactly fun, but thinking about all the things you’d like to do later in life can make it much more rewarding. With a bigger-picture outlook, my client was able to identify ways he could save regularly, and began to make deposits from his paycheck directly into his investment account.
Mortgage rate savings
Mortgage lenders evaluate borrowers on a number of different risk factors, including their FICO scores and the down payments they can provide. The higher your score and the more you can put down, the better the mortgage rate you’ll qualify for. Because of his improvement in these two areas, my client was able not only to secure a loan, but to save thousands on the transaction.
By my calculations — based on a point system many lenders use to evaluate risk and assess the fees they’ll charge borrowers — my client was able to save $3,860 by raising his FICO score to 715. That accounts for the additional mortgage lender fees he’d have incurred if his score was 620, the minimum many lenders will accept. Similarly, he saved $3,560 by putting 10% down. That accounts for the additional costs he’d have incurred if he’d only put the minimum 3% down.
That extra $7,420 would have taken the form of additional upfront closing costs or a higher interest rate, which would have resulted in a higher monthly payment.
I’m excited about the progress my client has made toward financial independence. Having a better financial standing allowed him to buy 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 in his new home alone – his girlfriend is helping him pick it out!
Image via iStock.