Buying a home is a lifetime investment and if you are going to do it, you need to do it right. Below are common mistakes homebuyers make that you need to avoid.
1. Not Having Enough Savings for a Down Payment
Taking up a loan with an insufficient down payment is a common home-buying mistake you should avoid. It not only results in the need for a bigger mortgage but also results in higher installments. Before you can take up a mortgage, ensure that you have enough funds saved up for a down payment.
It is recommended that you save up enough cash to cater for at least 20 percent of the home’s initial price to avoid paying the private mortgage insurance which insures lenders against defaulting borrowers. PMI can be hard to cancel, which is why you shouldn’t look forward to paying one.
2. Buying Based On Emotions and Ignoring the Neighborhood
Choosing a house you love and ignoring other important factors like price and location is a big mistake. Just because you love a home doesn’t mean you should buy it. Making decisions based on emotions will lead you to financial choices that you may regret later.
Here are a few signs you might be scoping out a house in a bad neighborhood:
- High amount of pawnshops and payday loan stores nearby
- High homeless population
- Empty storefronts/many “for rent” signs in business windows
- High police presence
- High amount of trash
- Few people outside/walking around the neighborhood
Instead of focusing on your current wants, think about the bigger picture and figure out if your current pick will still be financially feasible and also meet your family’s needs in the future. You don’t want to live in a neighborhood with rampant crime and few amenities. Avoid basing your decisions on emotions so that you don’t overstretch your budget for the sake of temporary gratification.
3. Underestimating the Costs of Home Ownership
A common mistake with home buyers is making the wrong estimation of the costs of homeownership. Most times, homebuyers tend to only look at the mortgage installments and closing costs without factoring in maintenance, running expenses, and the cost of repairs and rehabilitation.
To avoid this mistake, talk to your agent and get all the details about the cost of your home. A real estate agent will help you establish the insurance costs, taxes, and even home maintenance expenses so you can plan accordingly. With the correct estimations, you can look for more affordable insurance options, and put aside adequate funds for repairs to avoid financial surprises.
4. House Hunting Before Securing a Loan Approval
Although looking for a house without the intention of buying may give you a detached and unbiased assessment, it is not the best thing to do. It sets you up for disappointment and wastes your time as you are more likely to shop outside what you can afford. Before you go looking for a house, ensure you have secured a loan approval so that you know what price range to concentrate on.
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A loan pre-approval not only gives you a figure to work with when looking for a home, but also instills confidence in the seller since you can make an offer for and back it up. Since mortgage pre-approvals are renewable, you don’t have to worry about them expiring before you can find your dream home.
5. Choosing the Wrong Mortgage
There are a lot of lenders and mortgage options suited for the different financial capabilities of homebuyers. While this offers an opportunity for diversity, it is also a recipe for mortgage mistakes. According to studies, 27 percent of first time home buyers regret their choice of lenders. There are also instances where home buyers choose financial packages, which turn out to be unaffordable.
To avoid choosing the wrong mortgage, you should perform due diligence on the various lenders and the financial products they offer. Compare their rates and seek clarification from your mortgage broker whenever there’s need so that you can choose a mortgage that fits within your means.
6. Overlooking Home Inspection
Home inspections are critical when buying a home as they expose any existing flaws both in utilities like heating and cooling systems, plumbing, and electrical, as well as structure. However, with home buyers trying to cut costs, most make the mistake of skipping the home inspection. While you may save a few hundred in the process, you could end up paying more in repairs.
Before buying a home, make sure you inspect it so that you can establish if you are willing to pay for it despite the flaws. You can decide to have the flaws fixed, or use them to bargain for a lower purchase price.
Here are some red flags you should look for during your home inspection:
- Leaking oil tank(s)
- Outdated HVAC system (this is something you may need a standard home inspector for)
- Roof problems
- Damaged chimney
- Water disbursement
- Knob and tube wiring (if the home is old)
- Unstable foundation
- Soft spots or odors in and around floors
- Radon (requires a radon test)
- Exhaust fans that vent to the attic instead of the outside
- Lead paint
- Presence of abandoned/damaged septic system
7. Getting into More Debt Before Closing
As a home buyer, avoid getting into more debt before your loan is finalized. More debt increases your debt-to-income ratio and reduces your credit score, both of which are essential factors financiers look at before approving a loan.
Lenders conduct last checks on your credit status a week before closing to ensure it is still the same as when you applied for the loan. If your credit score drops or your debt-to-income ratio increases in between, your interest rates may be revised upwards, the closing may be delayed or your loan may even be canceled.
By avoiding the above mistakes, your home buying process will be a hassle-free experience. If you are a first-time buyer, this guide will help relieve the stress that comes with understanding down payments.