These Are the 8 Most Common Homebuying Mistakes Foreclosure Experts See
As a foreclosure prevention advisor at a Housing and Urban Development (HUD) approved counseling agency, I see my clients suffer the consequences of their homebuying mistakes on a daily basis. Sometimes they are facing foreclosure due to the economy — job loss or pay reduction — but a lot of the time it's because they weren't prepared to buy a home. Either their credit wasn't good enough and they signed for a high interest loan they can't afford, or they don't have an emergency fund. (See also: What First-Time Homebuyers Need to Know)
Below I've listed eight mistakes I see on a regular basis. Read and heed so that when you purchase your first home, you are able to keep it.
1. Forgetting About Other Costs
When you rent a place, you'll pay rent, utilities, and (hopefully, if you're smart) renter's insurance. When you buy a home, you'll be paying down your principal with interest, property taxes, homeowner's insurance (which is a lot more than renter's), utilities (which are probably more, because you're likely moving into more space), and all maintenance costs. You won't be able to call your landlord if you have a leaky faucet. You'll either have to fix it yourself or call a plumber. Keep this in mind when you buy a home, and be ready. Most experts suggest having an emergency fund equal to all of your expenses for six months. And through the actual homebuying process, don't forget that there are closing costs associated with purchasing a home, including appraisal fee, credit report fee, escrow fee up front, and more. Do your research and save up as much as possible. (See also: Costly Things New Homeowners Don't Prep For)
2. Falling in Love With a House
I'm obsessed with homes. When I was younger, I used to draw out my home with architecture catalogs. And even now, when I get stressed out, I like to go shopping for homes online. In other words, I understand — buying a house is fun! But be careful. You could end up going over budget if you get too excited about all the things your house could have. You don't necessarily need a breakfast nook or a pool. In fact, before you even start looking for a home, it's best to get pre-approved for a loan. This will tell you exactly how much the bank is willing to lend you. Then, only look for homes in your price range. (See also: Emotions Can Hurt a Home Buyer)
3. Buying a Home You Can't Afford
This seems obvious, but it's surprising how many people do this. The mortgage industry considers your mortgage payment to be affordable if it is 31% or less of your gross monthly income. That payment includes principal, interest, taxes, insurance, and HOA fees. But this might not be affordable for your lifestyle. Really sit down and crunch the numbers, and make sure your home fits into your spending habits. Also, if you're purchasing your home with another person, don't base the payment on two incomes. Base it off one. That way when something happens, you'll still be able to make your payments.
4. Not Making a Full 20% Down Payment
When you buy a home, make sure you have a large down payment ready. You want to build up equity before you buy, so that if you decide to sell later, you don't lose money on the transaction. If you don't, you might end up paying pricey private mortgage insurance (PMI) every month until your equity is up to 20%. If you do this, your mortgage will be considered risky, which basically means you're more likely to default on your loan, and your lender requires insurance to cover potential losses. (See also: Financial Must-Haves for the First-Time Homebuyer)
5. Skipping the Inspection
You're purchasing a home that you hope will last forever, or at least well past the 30 years it will take you to pay it off. So don't trust your real estate agent with your entire life. Make sure to get a home inspection by someone you trust. You need to know what you're getting into so you can prepare. God forbid you're one year in and your foundation starts leaking or your porch starts to fall off.
6. Buying With Bad Credit
If you have terrible credit, the chances of you getting a good loan product are slim to none. And don't believe that predatory lending is dead, because it's definitely still out there. Adjustable rate loans, balloon notes, and high interest rates still exist. If you have terrible credit, contact a HUD-approved counseling agency or seek out credit counseling. Repair your credit first and only then consider buying a home. (See also: Rebuild Your Credit in 8 Steps)
7. Making Lots of Spendy Credit Activity
Buying a house is exciting, and you might think you also deserve a car. I hate to break it to you, but you don't. Do not, and I must emphasize this, do not buy a car before you buy a house. Do not take out a credit card. In fact, don't do anything but pay your bills and save money. Anything you do could affect your credit, and everything will change when you go to close. It could cost you your home.
8. Buying If You're Not Planning to Stay Put
Homeownership is 30 years. You may want to sell your home quicker than that, and there's nothing wrong with that — most American homeowners don't stay the full 30 years. But if you like moving every year, homeownership isn't for you. I decided a long time ago it's not for me. I have anxiety about signing a year lease, so a 30-year mortgage will never float my boat. If this is you, weigh your decision carefully.
What mistakes have you seen homeowners make? Please share them in comments.