Buying your first home can be an exciting experience — but it can also be complex, confusing and time-consuming. To make sure you do it right, here are seven common traps first-time home buyers fall into that you should avoid.
1. You’re Not Sure How Much You Can Really Afford
“How much can I borrow?” is not the same as “How much should I borrow?” The mortgage that you qualify for isn’t necessarily the amount you can actually afford. To see what size loan you might qualify for, try these mortgage calculators — but remember that maxing out your mortgage might not be wise.
How much “should” you borrow? The answer depends on the type of lifestyle you want to enjoy. Are you a homebody who spends every Friday and Saturday night reading books and watching movies at home? Or do you want to spend the next few years traveling to Europe, Asia and Latin America, dining at foodie restaurants, taking scuba-diving lessons and enjoying other adventures?
If you’re a homebody, spending 28 percent of your income on your mortgage might make sense. If you’re an adventurer, however, you might want to wrestle down your home payment to a much smaller percentage of your income, so you can save the rest for travel and excitement.
Bear in mind that homeownership brings extra expenses such as utilities, homeowners insurance, property taxes and maintenance and repair costs. Factor those into your monthly budget to find out how much home you can comfortably afford without becoming “house poor.”
2. Overlooking Extra Costs
Your mortgage isn’t the only cost to consider when purchasing a home. You’ll also have to be ready at the outset to cover closing costs — potentially including loan origination fees, appraisal and home inspection costs — as well as moving costs and any necessary repairs you’ll need to make when you take possession of the home.
Some of these (like loan origination fees) can be rolled into your mortgage, while others (like moving costs and upfront repairs) must be paid out-of-pocket immediately.
Make sure you have a budget that can cover several thousand dollars of extra expenses related to home buying.
3. Not Getting Pre-Approved for a Mortgage
Before you even start looking at houses, you should get pre-approved for a mortgage. This carries two benefits: First, you’ll know the price range for a home you can realistically purchase, and second, many realtors won’t even let you put a bid on a house until you’ve completed this step.
Note that “pre-approved” is different than “pre-qualify.” Pre-qualification is a quick and simple process, while pre-approval requires more paperwork, time and energy. Pre-approval, however, carries more weight and may make your offer stand out if the seller receives multiple offers. Don’t lose out on your dream home because you weren’t prepared.
4. Getting Too Emotional
It’s easy to fall in love with a home at first sight, but don’t let that initial emotional reaction cloud your judgment. Look beyond the aspects you adore and ask yourself if the entire house is the right fit for you — is it large enough, is the layout workable, is it in the right neighborhood, will you have to make any costly renovations? Make an informed decision, or you could wind up disliking the home in the long run.
5. Being Too Critical
On the flip side, you don’t want to nit-pick too much and focus on minor aesthetic issues that can easily be fixed. An ugly carpet can be torn out; a hideous wall color can be repainted. Look at the basic bones of the home and remember that minor details can always be changed.
6. Not Getting a Home Inspection
Without a home inspection, you could be purchasing a money trap without even knowing it. Home inspections shine a light on potentially pricey (and dangerous) issues with a home and can save you from getting in way over your head. Don’t be scared off by the high cost of a home inspection, which typically runs $300-$500. If it saves you from buying a house that would have needed $20,000 in unanticipated repairs, that inspection fee might be the best money you’ve ever spent.
7. Not Having a Down Payment
If you can’t put a full 20 percent of the closing cost down, you’ll need to pay private mortgage insurance, or PMI. This will increase the cost of your monthly mortgage payments, which will already be higher because you’re borrowing a larger sum (90 percent instead of 80 percent).
If you don’t have 20 percent to put down right now, wait until you do, or look for homes at a lower price point. Perhaps you could purchase a small condo instead of a single-family home, or make compromises on the level of finishes or the neighborhood location.
Paula Pant quit her office job in 2008, traveled to 32 countries and is a successful real estate investor. Her blog Afford Anything is the groundswell of a rebellion against tired old financial advice that says you should skip lattes and chain yourself to a desk for 40 years. Afford Anything helps you crush limits, create riches and maximize life.