While a house can be a great investment and an even greater place to call home, there are specific pitfalls to avoid at all costs. The following are five mistakes all homebuyers should dodge when looking into buying a new home:
1. Don't Buy a House if You Have Plans to Move Again
Many people become enamored with the idea of being a homeowner and make a purchase even though they know they plan to move again soon.
Understandably, people feel it's wrong to continuously rent and write checks to landlords while paying down zero equity on a house they do not own. Based on the feeling that paying down equity is better than paying a landlord, many people jump into home ownership with the idea that it is a good investment regardless of the time horizon.
If a potential homebuyer is not sure he plans to stay at his current location for more than two years, it is probably not a good time to make a purchase. With closing costs, property taxes and the possibility of a depreciating asset, homebuyers who move soon after purchasing a house might lose more money than the equity they pay down.
2. Don't Blow Through a Set Budget
It may be due to the rise in popularity of home-purchasing shows on networks such as Home and Garden Television (HGTV), but many potential homebuyers set a budget and then immediately disregard it when they see a house out of their price range.
However, the budget was set for a reason. Back when emotions were not involved, the set budget was probably based on logic and financial constraints. It is important for a homebuyer to remove his emotions from the financial equation.
While budgets can be stretched and dollars met, many homebuyers do not take into account scenarios where income might decline or the real estate market might depreciate. If this happens, the budget reworked to buy a "dream home" ends up being a huge mistake.
To combat this potential mistake, make sure to get preapproved for a loan prior to house hunting. This way an upper limit is set and only houses below that limit are viewed.
3. Don't Forget About Added and Hidden Costs
Alluded to above, buying a house is not a simple act of trading a rent payment for a mortgage payment. First, there are closing costs, property taxes, homeowners insurance and even homeowners' association (HOA) fees. Additionally, homebuyers almost never think about maintenance costs that are normally covered by the landlord of the place they are renting.
With all of these added and hidden fees, it is entirely possible that even a house within budget might quickly become over budget. It is important to factor in these costs when searching for a home and making a purchase decision.
To do this, inquire around as to how much average maintenance, other taxes and insurance cost in the home's location. Add these costs to the monthly mortgage to get the potential real cost of home ownership. Further, get an accurate estimate of what your mortgage will be, with interest by using a mortgage calculator in advance of your big purchase.
4. Don't Skimp on the Down Payment
While the economy continues to climb and houses continue to appreciate, do not forget about the 2008 financial housing crisis. While there were many factors to the economic downturn, a lot of it was due to lenders giving mortgages to unvetted buyers at little-to-no down payment.
While not all homebuyers default, skimping on the down payment means the monthly mortgage payment is much higher; do not forget this increases the interest payments. Even though it sounds better to put less down and then cover a higher mortgage with a level of monthly income a home owner might already have, do not be fooled. This is the exact mentality others had before defaulting pre-2008.
A small down payment ensures a homebuyer not only has a higher monthly mortgage, but also has less initial equity in the house. If something comes up and the home owner has to sell, it is possible he will owe more than the equity he has in the home.
Additionally, if a small down payment is put down, mortgage insurance needs to be paid until as much as 20% of the house is paid off, further increasing expenses. If possible, wait until 20% can be put down for the purchase of a home.
5. Don't Forget to Take Advantage of an Inspection
If anyone has seen the HGTV shows mentioned above, oftentimes the most beautiful houses become the most nightmarish. This is because although a house may look great on the outside, there can be many problems waiting below the surface.
Leaky pipes, a lack of proper insulation, an eroding foundation and even a faulty chimney are just a few of the many problems that might not be found by a potential homebuyer at first glance. If the house is taken at face value and purchased, the new home owner becomes responsible for all of those potential problems.
It is important, then, for a potential homebuyer to have the house inspected by a professional inspector. These professionals know exactly what to look for when a house is on the market, even including hard-to-spot water damage and termite infestations.
Often, the cost of inspection can even be covered by the seller. If any significant damage is found during the inspection, the repair prices can be negotiated into the purchase price of the home, protecting the homebuyer from paying out-of-pocket for these costs.