You’re buying a home! Can you believe it? Pretty soon you’ll be running barefoot on your own fresh-cut lawn and chasing your kiddos around the sprinkler. But you need to beware of a few home-buying mistakes.
Buying a home is one of the largest purchases you’ll ever make, and doing it wrong will cripple you with stress and rob you of your other financial goals. So protect yourself by knowing what not to do.
Here’s a list of typical home-buying mistakes and how to avoid them.
Mistake #1: Buying a House When You Have Debt
Trying to buy a house when you’re in debt is like trying to run a marathon with a bunch of weights chained to your legs. Even if you make it to the finish line, you won’t get your medal (or any free bananas) because everyone else will be long gone by the time you make it there. Debt weighs down your monthly budget. It holds back money that could otherwise speed up your house savings goal. Piling a mortgage on top of monthly debt payments like student loans, car loans or credit cards will put you just one emergency away from foreclosure.
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Instead, push pause on the house for now, and dump the debt that’s holding you back. Then build and maintain a full emergency fund to protect yourself from ever going back into debt.
Mistake #2: Buying a House You Can’t Afford
You’d think this would be an obvious red flag, but it’s a home-buying mistake people make all the time. They say, “Sure, this house costs more than I planned to spend. But it’s so perfect! I’ll just take out a bigger mortgage” That’s a bad idea. Taking on more mortgage than you can afford is like dropping an atomic bomb on your budget. You’ll wipe out all your other financial goals and struggle just to pay the electric bill.
So before you go looking for your dream home, figure out how much house you can afford. For starters, a house payment should never cost more than 25% of your take-home pay. That includes principal, interest, property taxes, homeowner’s insurance and, depending on your situation, it also includes private mortgage insurance (PMI) and homeowners association (HOA) fees. Use our mortgage calculator to enter your down payment amount and try out different home prices within your budget.
Mistake #3: Not Saving Enough for a Down Payment
If you’re getting a mortgage, one of the worst home-buying mistakes you can make is not saving enough for a down payment. Any amount less than 10% is way too low! Yet, government-insured programs (FHA, VA, USDA) are making it easier to buy a house with little to nothing down. Sounds nice, right? The problem is that you’ll be charged so much extra in interest and fees that you’ll feel like you’ll never pay off your home.
So how much should you save for a down payment? As much as possible! But for reference, we recommend saving at least 20% of the total house price to avoid paying PMI—a type of insurance that protects your lender from losing money in case you can’t make your mortgage payments. If you want a simple plan to beef up your down payment as fast as possible, use our free Saving for a Down Payment resource.
So how much should you save for a down payment? As much as possible! But for reference, we recommend saving at least 20% of the total house price to avoid paying PMI.
Mistake #4: Forgetting About Closing Costs and Moving Expenses
Another mistake is to focus so much on saving for your down payment that you forget about other home-buying expenses. Closing costs (which generally include the appraisal fee, home inspection fee, property taxes, different types of insurance and legal fees) can be 3–4% of your home’s value.(1) For a $200,000 home, that’s another $6,000–8,000 you’ll need to save on top of your down payment, and you have to pay that before your closing date.
Also, don’t forget about moving expenses! The average cost for a local move typically ranges anywhere from $560 to $1,000 for a three-bedroom house.(2) So plan ahead for these costs, and don’t cheat by stealing from your down payment amount or emergency fund. You’ll need those!
Mistake #5: Not Getting Preapproved
Picture this: You’ve found the perfect house that actually fits your budget! Your heart races with excitement as you make an offer. Too late! The seller goes with another buyer. Why? Because the other buyer included a mortgage preapproval letter with their offer. A mortgage preapproval letter not only tells the seller you're a serious buyer, but it also says choosing you means the paperwork process will move faster. Getting preapproved (not just prequalified) gives you a leg up on the competition. Trust us, it’s worth spending the time to get preapproved. Our friends at Churchill Mortgage can help.
Mistake #6: Getting the Wrong Mortgage
There are many types of mortgages. Most of them (ARM, FHA, VA, USDA) are designed to get you into a house no matter your financial situation. But if you sit down and do the math, you’d probably think twice about the tens of thousands of dollars you’d pay in interest and fees, and the decades you’d spend in debt by getting the wrong mortgage.
So what’s the right kind of mortgage? The answer is a 15-year fixed-rate conventional mortgage. It saves you the most money in interest and fees overall compared to the other mortgage options. Lots of lenders will say you can afford more, but stay conservative.
What’s the right kind of mortgage? The answer is a 15-year fixed-rate conventional mortgage. It saves you the most money in interest and fees overall compared to the other mortgage options.
Mistake #7: Cosigning Your Mortgage
Getting someone to cosign on your mortgage is a serious home-buying mistake. To explain why, we asked one of our Facebook fans to share her experience. Natty B. was in her early 20s when she followed the example of her friends and bought her own place. She already had $100,000 in student loans (see Mistake #1) and she needed to have her mom cosign the mortgage for her.
“I ended up having to work six days a week to afford the house,” she told us. “I lived in a four-bedroom house for nearly two years [and it was] completely unfurnished. [I had] no money for furniture.”
Natty said she eventually rented out her home and moved back into her parents’ house. If you can’t buy a house without a cosigner, protect your financial future by postponing your purchase.
Mistake #8: Buying Mortgage Points
When shopping for mortgages, your lender might offer you an option to buy mortgage discount points. They’re a way to lower the interest rate on your mortgage, but that’s only because you’re paying part of the interest on the front end instead of over the life of the loan. Mortgage points typically aren’t worth it. Most buyers won’t regain their money because they usually refinance, pay off, or sell their homes before they reach their break-even point.
Rather than buy mortgage points, you could put that extra money toward your down payment and reduce your loan amount altogether. If you’re still worried about a high interest rate, limit yourself to the shorter-term 15-year mortgage we recommend.
Mistake #9: Not Using a Real Estate Agent
With all the high-tech real estate apps and websites available, you might think no one needs a real estate agent to buy a house these days. Wrong! In fact, nearly 90% of buyers who purchased a home last year used a real estate pro.(3) That’s because an experienced agent helps you to:
- Figure out what kinds of homes you can expect in your market and price range
- Find the latest home listings with up-to-date information through a multiple listing service (MLS)
- Beat competing buyers who are only searching online
- Negotiate the right price for your perfect home
Plus, in most cases, the seller covers the commission for your agent. So you get all the benefits for free! We know what a loss it can be to try and buy a house without an agent. That’s why we developed our Endorsed Local Provider (ELP) program that instantly connects you with one of the top-performing real estate agents in your area for free.
Mistake #10: Focusing on Style Over Structure
Passing on a near-perfect house just because you hate the paint job is a rookie home-buying mistake. Do your best to overlook clutter like bad landscaping, outdated carpeting and the velvet Elvis in the living room. If you house hunt with a mindset that you can easily replace cosmetic issues, you could score yourself a deal.
Instead of worrying about appearances, pay attention to things that aren’t so easy to fix—like structure. Does the floor plan fit your family? How old is the roof? Are there any problems with the foundation? Are there any signs of issues with the electrical or plumbing systems? You don’t want to get stuck buying a house with bad bones.
Do your best to overlook clutter like bad landscaping, outdated carpeting and the velvet Elvis in the living room. If you house hunt with a mindset that you can easily replace cosmetic issues, you could score yourself a deal.
Mistake #11: Ignoring Resale Value
The resale value of your home may not seem important at move-in, but you can bet it will be at some point in the future. Research shows that people typically live in their homes for less than 10 years.(4) Keep that in mind when deciding which location and home features are right for you.
Here are some tips: Study the neighborhood. If nearby businesses are boarded up or there are lots of empty houses, think twice about moving in when so many people seem to be moving out. Ask if there are any developments planned for the area. Some (like the addition of city water, septic, or gas lines) add value to your property. Others (like a highway that might run through nearby properties or a trash dump—yuck!) can lower property values.
Mistake #12: Buying Without a Home Inspection
Remember when we said to focus on structure over style? A home inspection is one way to do that. Sure, a professional inspection usually costs a few hundred bucks. But it’s money well-spent if it helps you to avoid potential disasters after closing. An inspection includes a thorough review of the home’s structural elements and electrical, plumbing, heating and cooling systems. The inspector’s report gives you the information you need to decide to buy the home as-is or to negotiate with the seller to fix the problems or reduce the price.
Mistake #13: Not Walking Away From a Bad Deal
The home-buying process has many moving parts, and each one has the potential to turn a favorable deal into a disaster. For example, your home inspection could turn up problems that should reduce the seller’s asking price. If the seller isn’t willing to negotiate, you have to decide whether you want to live with (and pay for) those problems or decline to buy the home altogether.
That can be a tough choice if you’ve already decided this is the one and only perfect home for you. Don’t wind up regretting the choice to overpay for a house with problems. Maintain your power to walk away. Nix the deal and keep looking until you find a home in excellent condition that has most of the features you want.
Mistake #14: Taking on Credit While Closing
Remember: Buying a house when you have debt is one of the worst home-buying mistakes you can make (see Mistake #1). And taking on new debt while you’re buying a house is no different! This actually creates a delay in the closing process. If you borrow money, it changes your credit score and it’ll send your mortgage approval back to the drawing board.
Save yourself the trouble and maintain your finances from preapproval to closing. Don’t do anything that could change your credit history. And while you’re at it, make sure you’re up-front with your lender about all your payment obligations (like child support). Otherwise, these issues could change your debt-to-income ratio, which means it will take much longer for you to buy a house.
Mistake #15: Forgetting About Insurance
Not having the right insurance policies in place could make for another nasty mistake. Imagine that you close on a nice house and then the previous owner's crazy Uncle Eddie appears out of nowhere and claims the home was left to him in a will. If you have title insurance, the insurance company will pay Eddie to walk away, and you'll then have a clean title.
Also, don’t forget about homeowner's insurance to cover you in case of fires, floods or other disasters. Choose insurance that covers the cost of replacing your belongings and provides enough coverage to rebuild your home if it’s destroyed or damaged. Check your coverage each year to make sure the amount is sufficient. A trusted insurance professional can help you figure out what amount is right for you and even bundle different types of insurance for a discount.
How to Buy a Home the Smart Way
Okay, now you know which home-buying mistakes to avoid. But how do you buy a house the smart way? Well, we created a step-by-step plan that gives you a clear path to make a smart home purchase and compiled it for you in our free Home Buyer’s Guide.
There are a ton of home-buying mistakes to watch out for. And each mistake could cost you thousands of dollars—or thousands of headaches. That’s why we match you with the best-performing real estate agents in your area through our free ELP program. We make it easy for you to connect with an agent who shares your values and helps you avoid these home-buying mistakes.
Find a local real estate agent today!