Recently, my husband and I bought our first home and now we’re shopping for a second home to use as a rental property. Needless to say, we’re both getting a crash course in what not to do—as well as what to do! By avoiding these five common mistakes when buying your first home, you’ll be able to select a home you can afford and enjoy! If you’re selling your home, check out this article.
1. Looking at too much home for your budget.
Just like visiting a donut shop when you’re on a diet, looking at more home than you can afford can backfire in all kinds of ways.
- Risk: Letting your real estate agent, lender or partner convince you that you can afford something outside of your budget.
- Consequence: If you spend too much, you risk foreclosure, damaged credit and possibly even bankruptcy.
- Your fix: Make a budget before you start shopping for your first home. Include all known expenses except for your current rent or mortgage expenses. Then calculate your annual net pay.
The formula: Net monthly pay – all monthly expenses = what you can afford
- Let's say you earn $75,000 a year net ($6,250/month).
- Your annual expenses are $54,000 ($4,500/month).
- $6,250 – 4,500 = $1,750
- This is the maximum you have to spend on all things "home" on a monthly basis, which must include mortgage, insurance, property taxes, fees and other expenses.
2. Confusing "pre-qualified" with "pre-approved."
As with any new experiences, buying your first home comes with a mandatory steep learning curve. There are forms to complete, people to meet and terms to learn. One of the most common mistakes first-time homebuyers make is to confuse similar terms like "pre-qualified" and "pre-approved."
- Pre-qualified: A fairly quick process (often done online after viewing your financial "big picture") where a potential lender gives you a down-and-dirty guesstimate of how much mortgage you can qualify for.
- Pre-approved: A much more in-depth process where you fill out a comprehensive mortgage application while the lender completes an equally comprehensive credit check. Only at this stage can you find out specifics like actual mortgage amounts and actual interest rates.
- Your fix: Complete both steps before even beginning to look at homes. This way you won't wander inadvertently outside your price range, get your hopes up only to dash them and waste everyone's time.
3. Forgetting that a new home costs more than the monthly mortgage payments.
We've all done it—began drooling over that thing we want (be it a pet, baby, car or house) before adding up all of the costs of owning it.
- Risk: Different types of properties can vary greatly in associated costs, including home association fees, property taxes, mortgage, homeowners insurance and more.
- Consequence: No one wants to find out (after the fact) that expenses exceed income!
- Your fix: Sit down and calculate all fees in advance, remembering that a condo, duplex, townhouse, patio home, and a standalone home may all have different types and levels of costs associated with them. Then add in the mortgage cost—this is how much it will really cost you to buy that new house you have your eye on.
4. Skimping (or skipping!) the independent inspection.
Unfortunately, my husband and I have skipped on several dream properties after the inspection results came back. Suffice it to say—some of those pretty homes (on paper) were hiding nasty surprises behind their facades.
- Risk: Trusting others to provide full disclosure "just because it’s the right thing to do." They probably won't, and the inspection is your one chance to find out what you need to know before you close.
- Consequence: Discovering when it's too late that your new home has permitting problems, costly repairs that have been neglected, pests, mold or something worse.
- Your fix: Hire your own independent, trusted inspector, pay the fee and get the results you need before you decide. This is the only way you can know for sure exactly what you’re buying.
5. Failing to check out the neighborhood…and its future.
You’re not just buying a new home—you’re buying into a whole community. It just makes sense to learn more about your new neighbors and the neighborhood before making a final commitment.
- Risk: Waking up "the morning after" to discover a demolition crew preparing to remove part of your neighborhood for a snazzy new high-rise, discovering in the first rainstorm that you’ve bought into a flood zone or finding out that your quiet little street is soon to become a major thoroughfare…..the risks are endless.
- Consequence: It may be unpleasant to live in an area that doesn't suit your needs, but what can be even less pleasant is finding out that it’s going to be very difficult to sell it and move on!
- Your fix: Research the neighborhood's zoning laws, city plans, proposed uses for any nearby undeveloped land or run-down properties, home values (have they been increasing or declining?), flood and sewage history, and anything you can think of that could impact your new home's resale value.