We’ve all made some bad buying decisions in our lives. How about those chrome spinners that you got for your car that went out of style after the early 2000s? Or those parachute pants you bought after you watched the MC Hammer music video? Yeah, those were bad purchases… but we forgive you.
However, one buying mistake that could leave you in a serious financial mess is if you buy a house at the wrong time! There are a few common homebuying mistakes that first-time buyers make that leave them up to their necks in debt!
You want your first home to be a place you can be proud of, not a pile of wood and bricks that makes you sick every time you look at it. If you’re in the market for your first home, keep on reading, because I’m going to tell you the 7 most common mistakes that first-time homebuyers make.
#1: Buying a Home When You’re in Debt
As I said before, buying a house the wrong way can leave you in financial turmoil if you aren’t careful. I’m talking about big-time debt. So, what’s the first homebuying mistake you should never make? Buying a home when you have debt already!
That’s right, if you’re in any amount of debt beyond a modest balance on your credit card, you shouldn’t even think about buying a house! Buying a house when you’re in debt is like running with lead shoes, and that’s a one-way street to foreclosure.
If you have outstanding student loan payments, an auto loan, or a significant amount of credit card debt, it’s going to take away from your monthly budget. And piling a mortgage on top of that is only going to make it harder to save, or even just meet your financial obligations.
What happens if something breaks in your home? You’re going to have no money to get it repaired! What happens if some big expense comes up like a medical bill? You might not even be able to make your mortgage payment, and the bank is going to take that house you just bought right back!
I can’t stress this enough: before you buy a house, get all your other debts paid off. In fact, you probably want to pay off your debts and then pile up some savings, just to be safe. Don’t put yourself in a bad situation. Your first home isn’t going anywhere. Get those debts paid off first.
What’s a good way to make sure you don’t get into more debt once you buy your house? Make a bigger down payment.
#2: Too Small Of a Down Payment
A lot of first-time homebuyers think that it’s better to pay as little down as they can, as if they’re pulling a fast one on those financial geniuses at their mortgage lending company. I’ve got news for you: they’re the ones pulling a fast one on you!
Yeah, just because you’re paying less upfront with your 5% or 6% down payment, just means you’re going to have way higher mortgage payments. Having a smaller down payment means that you have less equity in your home from the start, and it’s going to lead to you paying way more in interest over the life of your mortgage loan.
I’d recommend putting down at least 20%. I know that sounds tough. Hell, it is tough. The average home buyer has to save for 7 years to save up 20% of the value of their home. But, trust me, it’s worth it. That big down payment is going to save you so much money in mortgage interest, and you’re going to be thanking yourself down the line.
Having trouble making that 20% down payment? Well, maybe it’s because you’re looking at houses that you can’t actually afford!
#3: Buying a House You Can’t Afford
I get it, we all want to be the guy with the massive Malibu beach mansion. Or maybe you’ve been shopping for a home and you found one that’s above your budget, but it’s just so perfect! Maybe you think you can just take out a bigger mortgage and afford that dream house. Don’t do it! Buying a house that you can’t afford is a great way you never meet your other financial goals, and you’re going to struggle just to pay the electric bill and keep the lights on.
Before you go to buy a home, figure out just how much you can actually afford to spend. A good rule of thumb is that your home payment should never be more than 25% of your take-home pay. That includes principal payments on your mortgage, interest payments on your mortgage, property taxes, homeowner’s insurance, HOA fees, and private mortgage insurance if you have that. Figure out how much all that’s going to cost, and if it’s more than 25% of your take-home pay, don’t buy that house!
Wait! There are some other expenses that you have to factor in too! And people tended to forget about these expenses far too often! I’m talking about closing costs and moving expenses.
#4: Forgetting About Closing Costs and Moving Expenses
Alright, so you’ve been diligent trying to figure out your budget. You’ve looked at what your mortgage payments are going to be. You’ve inquired with your town about what your property taxes are going to be. So, you’re good, right? Wrong!
There are two sneaky expenses that people always tend to forget about: closing costs and moving expenses. That’s how much you have to pay your realtor to close the deal, and how much you have to pay the moving company to move all your fancy furniture.
Closing costs are typically 3% to 5% of the cost of your home. So, if you’re looking at a $300,000 home, that’s a whole $15,000 that your realtor’s going to want as soon as the deal’s closed! That alone could put you in some serious debt if you forget to factor it into your budget!
Moving costs are about $1,500 on average if you’re moving in-state and about $5,000 if you’re moving out-of-state. That’s not an insignificant amount of money either!
The bottom line is that when you’re going to budget how much you can spend on a house, make sure you can afford a 20% down payment, as I said earlier, but then you have to budget for closing costs and moving expenses on top of that.
You know when there are no closing costs? When you don’t close the deal! And you know when you don’t close the deal? When you don’t get preapproved!
#5: Not Getting Mortgage Preapproval
You did it. You found the perfect house in the perfect location. It easily fits in your budget. You love it, your wife loves it, your kids love it. It’s perfect. And then you go to close the deal, only to find out that the seller went with another buyer. Heartbreaking!
So, what happened? Well, that other buyer went and got preapproved for a mortgage and included the mortgage preapproval letter with their offer, and you didn’t! A preapproval letter tells the seller that you’re serious about buying the house, and it also means that all the paperwork is going to be a whole lot easier on the seller as well.
If you found the house you want to buy, go to a mortgage lender and get that preapproval letter showing that you’re preapproved, not just prequalified. That’ll give you a huge leg up on other buyers that might be looking at the same house as you.
Speaking of mortgages, do you really know the differences between the different kinds? Well, if you’re looking to buy a home, you’d better be sure you’re not choosing the wrong one.
#6: Choosing the Wrong Mortgage
If you don’t already know this, don’t trust the bankers when they tell you that you can afford more! Bankers love your debt. They eat it up! So, when you go in to apply for a mortgage and they tell you that you can afford a more expensive house with an ARM, USDA, FHA, or VA loan, tell them, “No way, Jose!”
A lot of those kinds of loans are meant to get you into a home no matter what your financial situation is, but they could end up costing you thousands and thousands of dollars in interest over time. Go with a 15-year fixed-rate conventional mortgage. It‘ll save you more money in interest and fees than any other mortgage option. Look how easy I just made that for you!
Alright, so the bank might be trying to screw you by hiding the better mortgage option, but look out! The buyer might also be trying to screw you by not disclosing something that a professional inspection might expose.
#7: Not Getting an Inspection
The last thing you want is to buy what you think is your dream home, only to discover a bunch of major flaws when you move in that are going to cost you a bunch of money to fix immediately. Maybe you’re thinking, Hey, I’d notice some cracks in the wall or a sink that doesn’t work, and I’m sure you would. But what about a faulty underground septic tank? Or an illegal room addition? Are you really that familiar with local building ordinances? Exactly.
Hire a professional inspection company and make sure that you don’t get screwed and have to pay an arm and a leg for repairs as soon as you move in.