Are you gearing up to buy your first place? Shopping for a home is exciting, exhausting, and a little bit scary. Your aim is to end up with a home you love at a price you can afford, but unfortunately, many people do things that prevent them from achieving that dream.
Arm yourself with our smart strategies and tips to get the most out of your purchase and avoid making the following 10 costly mistakes, which could put a hold on that sold sign.
1. Not Knowing What You Can Afford
As we've all learned from the subprime mortgage mess, what the bank says you can afford and what you know you can afford (or are comfortable with paying) are not necessarily the same. If you don't already have a budget, make a list of all your monthly expenses (excluding rent), including vehicle costs, student loan payments, credit card payments, groceries, health insurance, retirement savings, and so on.
Don't forget major expenses that only occur once a year, such as any insurance premiums you pay annually or annual vacations. Subtract this total from your take-home pay and you'll know how much you can spend on your new home each month. When calculating this figure, use a mortgage calculator to research current interest rates. This will give you an estimate of what your total mortgage payments will be.
Next, tailor your house-hunting to properties in your financial neighborhood. If you end up looking at homes that are outside your price range, you'll end up lusting after something you can't afford. That can put you in the dangerous position of trying to stretch beyond your means financially or cause you to feel unsatisfied with what you actually can afford. You may learn that you can't afford the type or size of home that you desire and that you need to work on reducing your monthly expenses and/or increasing your income before you even start looking.
- It's important to have a budget, know what you can afford, and find out how much a bank will lend you before you start shopping for your first home.
- Be sure to sign up with your own real estate agent once your home search is truly underway.
- Don't expect a property to be perfect—you may cringe at the flocked wallpaper in the den—but don't compromise on the important things on your list, such as the number of bedrooms for a growing family.
- A home inspection can help you avoid purchasing a property that's a money pit.
2. Skipping Mortgage Qualification
What you think you can afford and what the bank is willing to lend you may not match up, especially if you have poor credit or unstable income, so make sure to be pre-approved for a loan before placing an offer on a home. If you don't, you'll be wasting the seller's time, the seller's agent's time, and your agent's time if you sign a contract and then discover later that the bank won't lend you what you need—or that it's only willing to give you terms you find unacceptable.
Be aware that even if you have been pre-approved for a mortgage, your loan can fall through at the last minute if you do something to alter your credit score, such as finance a car purchase. If your actions cause the deal to die, you may have to forfeit any deposit or earnest money you put up when you entered into the contract.
3. Not Considering Other Expenses
Once you're a homeowner, you'll have additional expenses on top of your monthly payment. Unlike the days when you were a renter, you'll be responsible for paying property taxes, insuring your home against disasters, and making any repairs the house needs (which will occasionally include expensive items like a new roof or a new furnace).
If you end up purchasing a condo, you'll have to pay monthly maintenance costs regardless of whether anything needs fixing. That's because you'll be part of a homeowners association, which collects a couple of hundred dollars a month from the owners of each unit in the building in the form of condominium fees. Buying a cooperative apartment, another communal housing structure common in some cities will subject you to similar fees.
4. Being Too Picky
Go ahead and put everything you can think of on your new home wish list, but don't be so inflexible that you end up continuing to rent for significantly longer than you really want to. First-time homebuyers often have to compromise on things they want because their funds are limited. You may have to live on a busy street, accept outdated décor, make some repairs to the home, or forgo that extra bedroom.
Of course, you can always choose to continue renting until you can afford everything on your list—you'll just have to decide how important it is to become a homeowner now rather than in a couple of years.
5. Lacking Vision
Even if you can't afford to replace the hideous wallpaper in the bathroom right now, it might be worth it to live with the ugliness for a while in exchange for getting into a house you can afford. If the home otherwise meets your needs in terms of the big things that are difficult to change, such as location and size, don't let physical imperfections turn you away.
Besides, doing home upgrades yourself, even when you have to hire a contractor, is often cheaper than paying the increased home value to a seller who has already done the work for you. And you can do them according to your taste, not someone else's.
6. Being Swept Away
Minor upgrades and cosmetic fixes are inexpensive tricks that sellers use to play on your emotions and elicit a much higher price tag. Sellers may pay $2,000 for minimal upgrades or fork over several thousand dollars on staging. If you're on a budget, look for homes whose full potential has yet to be realized. Also, first-time homebuyers should always seek a house they can add value to, as this ensures a bump in equity to help them climb the property ladder.
7. Caving on Important Things
Don't get a two-bedroom home when you know you're planning to have kids and will want three bedrooms. By the same token, don't buy a condo just because it's cheaper than a house if one of the main reasons you're over apartment life is that you hate sharing walls with neighbors. It's true that you'll probably have to make some compromises to be able to afford your first home, but don't make a compromise that will be a major strain.
Look for a home that you can add value to, as the bump in equity from your upgrades will help you to move up the property ladder.
8. Neglecting to Inspect
It's tempting to think that you're a homeowner the moment you go into escrow, but hold on. Before you close on the sale, you need to know what kind of shape the house is in. You don't want to get stuck with a money pit or with the headache of performing a lot of unexpected (and potentially expensive) repairs. That's why you need to set up a thorough inspection of the property. Keeping your feelings in check until you have a full picture of the house's physical condition and the soundness of your potential investment will help you avoid making a serious financial mistake.
9. Not Using an Agent
Once you're seriously shopping for a home, don't walk into an open house without having a real estate agent or broker (or at least being prepared to throw out a name of someone you're supposedly working with). Agents are held to the ethical rule that they must act in both the seller and the buyer parties' best interests, but you can see how that might not work in your best interest if you start dealing with a seller's agent before contacting one of your own.
10. Not Thinking About the Future
It's impossible to perfectly predict the future of your chosen neighborhood, but paying attention to the information that is available to you now can help you avoid unpleasant surprises down the road.
Some questions you should ask about your prospective property include:
- What kind of development plans are in the works for the neighborhood in the future?
- Is the street likely to become a major street or a popular rush-hour shortcut?
- Is there talk of a bridge or a highway to be built very nearby in five years?
- What are the zoning laws in the area?
- Is there a lot of undeveloped lands? What is likely to get built there?
- Have home values in the neighborhood been declining?
If you're happy with the answers to these questions, then your potential house's location can keep its rose-colored luster.
The Bottom Line
Buying a first home can seem stressful and overwhelming, and it isn't without potential pitfalls. If you're aware of those issues ahead of time, you can protect yourself from costly mistakes and shop with confidence. For many people, a home is the largest purchase they will ever make, but it need not be the most difficult.