Understanding financial health is an essential, perhaps even the most crucial, step in securing a mortgage. When applying for a mortgage, it’s important to remember that lenders assess risk. They need to determine if lending a substantial amount of money to a potential borrower is a wise decision. To assure the lender that granting a mortgage is a low-risk proposition, home buyers must demonstrate their sound financial health.

So, what exactly is financial health? What comprises its essential elements, and how can it be improved?

Financial Health: What Is It?

Financial health refers to the present condition of an individual’s finances and its impact on their daily life. It encompasses all aspects of personal finance, ranging from mortgage payments and other debts to income, living expenses, and savings. By optimizing word choice, structure, readability, and eloquence, we can enhance the overall quality of the content while preserving its original meaning.

The concept of “financial health” is used because it has a profound impact on a person’s overall well-being, encompassing both physical and mental aspects. Studies have shown a direct correlation between poor financial health and diminished physical and mental health. Conversely, strong financial health, which doesn’t necessarily equate to immense wealth, has been associated with higher levels of happiness and better physical well-being.

While individuals are often aware of their physical and mental well-being, they may overlook the significant impact of financial health on these essential aspects of life. Therefore, the crucial point to remember is that attending to one’s financial health is not merely for its own sake, but for the overall enhancement of one’s well-being.

How Financial Health Works

The key lies in having the ability to handle both anticipated and unforeseen expenses. While many individuals excel at budgeting for day-to-day costs, they often find themselves unprepared when unexpected expenses emerge. Whether it’s an unforeseen medical bill, legal fees, or even the expenses incurred from an unplanned relocation, these unforeseen events can easily lead to overwhelming debt if one is not adequately prepared.

Savings play a vital role in maintaining good financial health. However, it’s not solely about preparing for unforeseen circumstances. Financially sound individuals can also indulge in luxurious vacations, dream weddings, or any other positive experiences that demand more financial commitment than everyday pleasures like dining out.

Having sound financial health not only enhances overall resilience but also empowers individuals to make better decisions during times of crisis or significant life events. In essence, financial health acts as a safeguard against the unpredictable stressors and challenges that are an inherent part of life. By being financially healthy, one can mitigate the psychological and physical toll imposed by life’s hurdles. However, it’s important to note that financial health encompasses more than just the ability to cover large or unexpected expenses. Other crucial factors to consider include:

• Assessing the manageability of your debt levels involves factors such as the ability to pay off a credit card balance in full each month. If you find it difficult to cover living expenses after making all monthly debt repayments, it indicates a state of poor financial health.
• Are you living within your means? Living within one’s means entails spending less than what is earned each month.
• Would you qualify for financial assistance, if required? Taking into account your current credit score, would you be able to secure a loan from a bank or mortgage lender at a reasonable interest rate?
• Are you struggling to manage multiple loans? Do you have numerous credit cards or just one or two loans that you effortlessly keep track of?

When evaluating financial health, it is important to take into account these key factors. For individuals who have never given thought to their financial well-being, developing a habit of consistent reflection and action may require some time and effort.

Improving Financial Well-being: A Quick Guide To Better Financial Health

Determining financial health doesn’t follow a one-size-fits-all approach. There’s no set formula to calculate it precisely. If your finances are intricate, seeking assistance from an accountant or financial advisor can simplify matters. However, for most individuals, focusing on these key areas is a great starting point:

1. Have you compared monthly income to monthly expenses? Understanding income and expenses is crucial for assessing financial well-being. If expenditures outweigh savings, it becomes necessary to identify areas where spending can be reduced.
2. What is your debt-to-income ratio? A person’s debt-to-income ratio (DTI) represents the proportion of their monthly income that goes towards debt repayments. This metric holds significant importance for individuals seeking a mortgage, as lenders utilize it to evaluate borrower risk. Moreover, the DTI serves as a valuable tool for assessing one’s overall financial well-being. By subtracting loan amounts from monthly earnings, one can ascertain the remaining funds available for living expenses.
3. Do you have a financial safety net? As mentioned earlier, unforeseen expenses can abruptly lead someone into debt. By committing to saving even a modest amount each month, it is possible to accumulate a substantial savings fund within a year. Remember, even a small contribution is far superior to saving nothing at all.
4. Do you have a strong credit score? Your credit score plays a significant role in the terms of your mortgage deal, and a poor score can lead to a rejected application. If you find yourself struggling with credit card balances, consider transferring them to a zero-percent credit card. This action will help reduce the amount of interest you need to repay, improving your financial situation.
5. Do you have a retirement fund? Planning for retirement may seem tedious, especially for the young, but it’s never too early to start. Giving careful attention to the retirement package offered by one’s employer is crucial. By considering the option to contribute more each month, one may be able to maximize the benefits. Many employers even match employee contributions, effectively boosting the overall retirement savings. For self-employed individuals and first-time homebuyers, exploring private pension schemes and committing to affordable monthly contributions based on current income is highly advisable.

This straightforward five-step plan enables individuals to enhance their financial well-being. Remember: financial health is intertwined with all aspects of life. Therefore, it is crucial to prioritize it, just like physical and mental health. Maintaining good financial health is especially important for first-time homebuyers. Searching for a first home can be a stressful and time-consuming process, and the last thing on someone’s mind during house hunting should be their financial well-being or mortgage approval.

It’s also worth noting that many real estate agents require a mortgage lender’s preliminary agreement before showing a property. Obtaining such an agreement not only strengthens a homebuyer’s position when negotiating a purchase but also sets the right mindset for finding their dream home.

How Does Financial Health Impact The Likelihood Of Obtaining A Mortgage?

The credit score is the most crucial factor that lenders consider when evaluating a mortgage application. It directly influences the loan approval, amount, and terms offered. Determining the most suitable lender for a financial situation can be challenging for those unfamiliar with the intricacies of finance. It is highly recommended to seek the guidance of an independent mortgage broker, such as Sword Mortgage, who can assist homebuyers in finding a lender that aligns with their financial health. Unlike bank representatives, independent mortgage brokers are not tied to any specific lender, enabling them to provide the best mortgage deals from across the market. This is why many individuals prefer consulting independent mortgage brokers rather than solely relying on their bank for mortgage options.

An independent mortgage broker assesses an applicant’s financial health and identifies suitable mortgage options. It is advisable to ensure one’s financial well-being before seeking a broker’s advice. However, even if there are some financial challenges, a broker might still be able to assist in finding a mortgage. As long as the prospective homebuyer has a decent credit score and can make improvements within a few months, consulting a broker remains worthwhile. It is important to note that a broker is not a lender, and speaking to them will not impact the chances of securing a mortgage.

Contact Sword Mortgage To Learn More About Your Options

Call (770) 757-5750 or complete our online form to speak with a loan expert at Sword Mortgage to get help navigating your options and find a loan that fits your needs today.