Of all the investment decisions you’re likely to make in your lifetime, a home purchase is by far the most personal. It’s no wonder that buyers are eager to rush right into the real estate market the moment they realize they’re in a position to buy. But because the purchase will likely be the most expensive one you ever will make, it’s important to organize your priorities and your finances before you jump in.
Ignoring Your Credit
Strong credit can save you thousands of dollars in interest over the life of your mortgage loan. Credit problems can take time to resolve, so the earlier you start reviewing your credit, the better. The first step is to order a credit report.
You’re entitled to one free report per year from each credit bureau, which you can order from AnnualCreditReport.com. However, you can check out your credit score for free (and without damaging your credit) with sites like Credit Karma.
If you spot signs of trouble or inaccuracies, contact the appropriate credit bureau as soon as possible. Things to look for include:
- Outdated information, such as a closed account that’s being reported as open
- Incorrect contact information
- Accounts you didn’t open
- Accounts listed multiple times
Also, be on the lookout for old collection accounts you need to pay off. If you moved, for example, your final utility bills might not have reached you and a balance could remain, even though the account is closed.
House Hunting Without a Buyer’s Agent
It might be tempting to go at it alone, armed with information available on the real estate portal sites. That could be a big mistake. Online sites let buyers view the inventory of properties on the market, but they aren’t a substitute for a professional’s knowledge.
A buyer’s agent who knows your local market can prepare a comparative market analysis to determine an appropriate offer price for the home you’re most interested in. They’ll also negotiate on your behalf to make sure your best interests are protected.
In many cases, your buyer’s agent is your only fiduciary in the real estate transaction, meaning the agent is the only professional you’ll work with who has a legal obligation to put your interests above their own. What’s more, the seller typically pays the buyer’s agent, so you’ve got nothing to lose by arming yourself with professional representation.
Shopping With Your Heart vs. Your Head
There’s no getting around the fact that buying a home is a highly emotional process. It’s something you’ve likely dreamed about and worked toward for a long time. But unless the images of life in your new home match the realities of your lifestyle, there’s a good chance you’ll regret your purchase.
A home in the country, for example, might seem idyllic for the peaceful lifestyle it affords, somewhat removed from the stresses of daily life. But you’ll also have a longer commute, fewer local conveniences and lots of yard to maintain.
When you purchase a property, don’t think only about how it will feel to live in the home. Also consider how well it will serve as the base of operations for all aspects of your life for years to come.
Overlooking the Larger Financial Picture
Your mortgage is just one of many home-related expenses you’ll pay after you purchase your home. Property taxes, homeowners insurance, water and sewer bills, and homeowner association fees significantly increase the cost of homeownership. Add in maintenance and repairs, and owning a home becomes a lot pricier than many buyers realize.
Failing to look at the whole picture can leave you strapped for cash the first time you’re hit with an unexpected bill. Keeping cash reserves on hand helps to ensure that you’ll have enough savings to ride out these extra costs.
Treating Real Estate Like a Short-Term Investment
It goes without saying that homeownership has benefits you can’t measure in dollars. But if wealth-building is driving your decision to purchase, be prepared to wait for a payoff.
Homes don’t always appreciate in value — and when they do, it typically happens over the long term. In the meantime, you will pay loan interest, taxes and other costs of homeownership using money that could get higher returns if invested elsewhere. That’s true even when you factor in the cost of renting vs. owning.
It can take years before you break even by owning a home instead of renting. Take, for example, renters in Salisbury, Maryland, who pay a typical $1,200 per month to rent. If those renters were to purchase a home at the median sale price of $234,000 with a 20% down payment, it would take more than 3 1/2 years before they’d spent less to own than they would have spent renting.
Forgetting About the Appraisal
You might be tempted to offer over asking price to make your offer more competitive, but that could mean bringing extra cash to closing.
Your mortgage lender will have the home appraised shortly after you submit your loan application. If the house appraises for less than 80% to 97% of the sale price, depending on the loan type, you’ll have to make up the difference with additional down payment money at closing.
Simply, lenders won’t finance more than the home’s value. If you still want that house, you’ll have to increase the money you pay up front.
Making a Money Mistake Before Closing
Your mortgage lender will pore over your credit history, assets and debts as part of the mortgage-approval process. But getting that approval doesn’t mean you’re out of the woods. The lender will check your finances again before the deal closes.
This additional review can disqualify you for your loan if you’ve taken out new credit or closed a credit account. New credit can push your level of debt beyond the maximum your lender allows. Closing an account frees credit, but it can reduce your credit score.
A large bank deposit or withdrawal also can get you into trouble. Mortgage lenders like for borrowers to have a cash reserve, saved from their usual income, that has been in the account long enough to show financial stability. A large withdrawal can reduce your cash reserves and make your lender nervous.
You should get back the deposit that you put on the home if you lose your financing and must back out of the deal — provided your purchase contract included a loan contingency. You’ll still be out the appraisal and application fees, as well as the cost of any professional services already rendered.
More Mistakes To Avoid
The better informed you are going into a home purchase, the less likely you are to make an expensive mistake. Here are some additional missteps that can cost you money:
- Skipping the inspection: The cost of resolving overlooked defects can cost far more than the price of a home inspection.
- Getting the wrong mortgage: An adjustable-rate loan with a low promotional rate might be fine if you’re planning to move within a few years, but a fixed-rate loan is a safer bet if you’re in it for the long haul.
- Putting less than 20% down: Making a down payment of less than 20% means you’ll have to pay private mortgage insurance, which costs up to $70 per month for every $100,000 you borrow.
- Sticking with the first lender you talk to: Shop around for the best rates. Also look for perks such as relationship discounts for opening or maintaining deposit accounts at the same bank.
- Not investigating programs for first-time buyers: First-time buyers might be eligible for assistance with the down payment or closing costs. Depending on the program, you might qualify even if you’ve owned a home in the past.
- Buying discount points: Discount points reduce the interest rate on your loan. One point equals 1% of your loan amount, so don’t buy points unless you know you’ll stay in the home long enough to break even.
- Skipping the fine print: Glossing over your sales contract, loan documents or HOA covenants, conditions and restrictions could result in a nasty — and expensive — surprise down the road.
- Backing out of the deal: Your contract might let you off the hook if you can’t get financing or the inspection reveals problems the seller won’t resolve. If you cancel for a reason the contract doesn’t specify, you could lose your deposit.
- Rushing into a fixer-upper: A great deal quickly turns into a money pit if you overestimate your ability to renovate a handyman special.
- Borrowing too much: Some buyers take on a higher payment than they can manage comfortably, assuming the payments will get easier as their earnings increase over time. But as the Great Recession and the coronavirus pandemic have proved, income doesn’t always move in the right direction.
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Morgan Quinn contributed to the reporting for this article.