10 first-time homebuyer mistakes
A house is probably the
biggest purchase you'll ever make. And, if you can avoid these missteps,
chances are you'll be happy with the home you choose.
Are you gearing up to buy your first place? Shopping for a home is
exciting, exhausting and a little scary, especially in this market. In
the end, your aim is to end up with a home you love at a price you can
afford. Sounds simple enough, right? Unfortunately, many people make
mistakes that prevent them from achieving that simple dream. Arm
yourself with these tips to get the most out of your purchase and avoid
making 10 of the most costly mistakes that could put a hold on that sold
sign.
1. Not knowing what you can afford
As we 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 occur only once a year, like 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.
What's the secret to saving money?
If you end up looking at homes that are outside your price range, you'll
end up lusting after something you can't afford, which 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 even 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.
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 get preapproved for a loan before placing an offer on a
home. 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 discover later that the
bank won't lend you what you need or that it won't give you a mortgage
you find acceptable.
Be aware that even if you have been preapproved for a mortgage, your
loan can fall through if you do something to alter your credit score,
like finance a car purchase. If you cause the deal to fall through, you
may have to forfeit the money that you put up when you went under
contract.
3. Failing to consider additional expenses
Once you're a homeowner, you'll have additional expenses on top of your
monthly payment. Unlike 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 replacing the roof or furnace).
If you purchase a condo, you'll have to pay monthly maintenance costs
regardless of whether anything needs fixing because you'll be part of a
homeowners association, which collects monthly fees from the owners of
each unit in the form of condominium fees.
4. Being too picky
Go ahead and put everything you can think of on your 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 something because their funds are limited.
You may have to live on a busy street, accept outdated decor, 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 for you 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 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 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 if 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.
6. Being swept away
Minor upgrades and cosmetic fixes are inexpensive tricks that play on
your emotions and elicit a much higher price. Sellers may pay $2,000 for
minimal upgrades or staging that you'll end up paying $40,000 for. If
you're on a budget, look for homes whose full potential has yet to be
realized. Also, first-time homebuyers should always look for a house
they can add value to; this ensures a bump in equity to help you up the
property ladder.
What's the secret to saving money?
7. Compromising on the important things
Don't get a two-bedroom home when you know you're planning to have kids
and will want at least three bedrooms. By the same token, don't buy a
condo just because it's cheaper when one of the main reasons you're over
apartment life is because 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.
8. Neglecting to inspect
It's tempting to think that you're a homeowner the moment you go into
escrow, but 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 repairs. 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 hiring your own agent or using the seller's agent
Once you're seriously shopping for a home, don't walk into an open house
without having an agent (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 the best interest of their clients,
but if you're a buyer, you'll probably have a stronger advocate for your
interests if you use your own agent and not the seller's.
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 your neighborhood?
Is your street likely to become a major street or a popular rush-hour
shortcut?
Will a highway be built in your backyard in five years?
What are the zoning laws in your area?
If there is a lot of undeveloped land? 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, your house's
location can keep its luster.
Buying a first home can seem stressful and overwhelming, and it isn't
without its share of potential pitfalls. If you're aware of those issues
ahead of time, though, 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
that doesn't mean it has to be the most difficult.
This article was reported by Amy Fontinelle for Investopedia.