We get our bodies in shape for bikini season. We get our home in shape to welcome a first baby. Likewise, we should get our finances in shape before applying for a mortgage or refinance.

At stake are thousands of dollars. That's because lower rates go to people with shipshape finances. What constitutes shipshape finances?

  • High credit score
  • Good debt utilization
  • Low balances on credit cards and other debts
  • Savings

Before you start pouring over listings and hunting for the perfect home, or planning the home improvement projects to be funded by a well-timed refinance, step back and look at your finances as a lender would. Give yourself six months to get your finances in shape before applying for a refi or new home loan. Some borrowers won't need that long, while others could probably benefit from taking more time. The point is that six months is adequate time to improve your financial profile so that lenders will view you more favorably.

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Here are your four target areas for the financial fitness program.

Strengthen Your FICO Score If Under 740

What's the ideal credit score? Opinions differ, but money guru Suze Orman says that you are sitting pretty if your score is 740 or better. "One of the most important factors lenders consider is your credit score," she writes. "FICO credit scores range between 300 and 850. If you have a FICO score of 740-760 or higher, lenders will be more eager to offer you the best deals."

Lenders are still willing to work with borrowers who have a fair-to-good credit score (around 660). They employ additional ways of assessing risk. Lendgo excels at matching borrowers with the lenders most likely to approve them.

Eighty percent of your FICO score comes from your payment history (35%), current balances (30%), and how long you've been borrowing (15%). You can't do anything about the latter, but your payment history and the amounts you owe are within your field of control. Pay your bills promptly every month, preferably the whole balance. If you can usually only swing the minimum payments due, you're probably not ready to take on more debt.

Slim Down Your Credit Card Balances

To shape up your finances ahead of a refi or new home loan, target those credit card balances! Current balances constitute 30% of your credit score. What's more, lenders will specifically look at your debt utilization ratio; that is, how much debt you carry divided by how much debt you could carry.

Here's an example of the debt utilization ratio in action. Let's say you have $9,000 in total available credit across three accounts. One balance is $200, another is $1,000, and the third is $1,400.

Total debt ÷ total available credit = debt utilization
($200 + $1,000 + $1,400) ÷ $9,000 = 29%

A ratio of 29% is good. Financial advisors recommend keeping your ratio under 30%. Lower is always better; it shows that you don't run up your balances just because you can.

Several months ahead of applying for a big loan, paying down credit cards should be a priority of yours. Limit your discretionary spending ("No pain, no gain"), and channel the money into making big payments on the accounts. Watch the balances dwindle, and pat yourself on the back.

Tone Your Debt-to-Income Ratio

How much you earn before taxes compared to how much you pay on debts—that's a major consideration for lenders looking at you as a potential borrower. They won't be eager to get in line behind a lot of other creditors.

Six or so months before applying for a refi or mortgage is the right time to focus on lowering the balances on student loans and auto loans. Pay more than the minimum amounts due. If you work overtime or get bonused, don't think of it as mad money. Rather, devote the money to paying down debts. Your focus and energy will dazzle potential lenders.

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Bulk Up Your Savings

While paying down debts is a great use of your discretionary income, you should also channel money into savings. Saving for a down payment and closing costs is only the start. Lenders like to see enough money in your savings to cover your payments for a few months in case of temporary income loss.

Suze Orman advises people to have an eight-month emergency fund. Business Insider is less conservative: "A single-earner household should have at least six months saved in an emergency fund. The best place to keep an emergency fund is somewhere easily accessible, like a savings account."

Some people think a second car or a spare bedroom is their emergency fund—they could sell the car or rent out the room. But those sources of income aren't fast enough. Plus, when you're in a hurry to get money, you are more likely to sell your property for less than it's worth. That's why an emergency fund should be cash in savings.


Before you apply for a mortgage or refinance, prepare to be looked up and down by potential lenders. Do what you can to strengthen your credit score, slim down your credit cards, tone your debt-to-income ratio, and bulk up your savings. Borrowers in the best financial shape are rewarded by the lowest rates, a reward that lasts years and years.

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