Copilot Advice

Scenario: After many years of poor financial decisions, I'm in my 30's, self employed as a barber, and working on rebuilding my credit. I've been trying to save money for a house, but I'm not sure if what I'm saving every month is enough. Also, I've heard that having one personal savings account and a separate one for the house down payment is helpful. Should I have two savings account? I try to save anywhere between $1k-$2k every month. I started saving in 2020 and I currently have $21k in savings.

Stats

Current credit scores: Equifax - 593 | Experian - 612 | TransUnion - 623

Annual income: $75k | $98K combined

Current monthly expenses: $1800 - $2200

Target house price: $250k or less

Veteran status: Not a veteran

Married with working spouse: Yes

Timeframe to buy: 2022

A few pieces of copilot advice:

1. You should be looking at your full financial picture as opposed to only focusing on the downpayment for the house. You've done a great job putting money to the side to get to a current balance of $21K. However, without mention of an emergency fund, you should really be reserving at least $13,200 (6 months of $2200 in high number monthly expenses) of that amount as your emergency fund. You will need such a fund to protect you and your family and give you the most financial flexibility even after you buy a house so best not to blow it on the house purchase itself. That leaves you with $7800 of savings that is actually available to go towards your house downpayment.

2. You would be wise to separate the 2 amounts of money so that you are less likely to take from one or the other unnecessarily. Of course, you don't necessarily have to open up separate accounts. Some banks let you establish different buckets for your money within the same account. However, you have enough money involved here where you could benefit financially from finding a bank that is offering a nice $200-300 bonus for opening a new account. It only makes sense to do this if you plan on keeping the money with the bank for 6 months or more so the $13,200 emergency fund is the most likely candidate for such a new account without you having to keep it all there for the same amount of time. You may even consider spreading that money across multiple accounts with different banks that are offering nice bonuses for depositing a certain amount of money and probably completing certain transaction activities. You will get a 1099 from each bank in January of the next year for each bonus that you receive though.

3. Even with $7800 as the remaining savings to go towards your house downpayment, you're still very close to having enough money to qualify for a low downpayment FHA loan assuming you stick with the $250K or less total house purchase price that you've been considering. Getting to a 20% downpayment to avoid PMI is great, but not always possible or necessary. Sometimes, you miss out on lower interest rates and growth in home equity that may have been significant than the PMI while you wait to get to the 20% downpayment amount. A little math can help you evaluate whether it makes sense to pull the trigger now or wait longer.

4. To get the best deal, you really do want to get your credit scores up to 740 or above. The best mortgage lenders that we've worked with seem to reserve their best interest rates and lowest fees for scores that are 740 or above. Have you truly analyzed what is keeping your scores below 660 besides the one baddie? Is it late payments? Is it high balances? Should some of the savings that you've put aside be repurposed for paying down some of those high balances in order to increase your credit scores sooner? With a lower credit score, if you do end up saving 20% for a downpayment to avoid paying private mortgage insurance (PMI), some or all of that savings could get eaten up by the higher interest rate and/or fees that you ultimately get for the mortgage.

5. With the housing market so hot right now, there is no guarantee that there will be a lot of options for you to choose from if you decide to pull the trigger now. You'll be competing with so many others who are ultimately driving home prices up at this time due to low inventory. With that said, if you get to the necessary FHA downpayment amount, a house that you want happens to be available for sale, and your credit score is better by then, we say go for it at that time. Consider the additional copilot advice that we have at moneycopilot.com at that time though to get the best pricing on your mortgage money.

Customers of Moneycopilot, LLC benefit from this and other Copilot Advice as well as proven strategies to improve their credit scores into the 700s, pay down unhelpful debt, establish savings where none seemed possible before, and be more strategic with how their money supports goals that help them live a better life. Anyone who is facing challenges getting positive results from managing their finances on their own can benefit from our services and we are happy to help. If you need assistance with improving your financial health or daily money management in general, we are at your service and you can start your journey today. Your wallet will thank you!