If you are planning to buy your first home, this is an exciting time in your life. Here at Trusted Choice®, we want to help you avoid those house buying mistakes that people often make. We want to see you move into a great home, one that will not cause you to feel buyer’s remorse. For this reason, we have compiled a list of the top 8 mistakes that first-time homebuyers tend to make, as well as advice on how to avoid them. Also, while you are looking at homes, you may want to speak with a Trusted Choice agent who can advise you about approximate insurance costs for houses in different neighborhoods.
Mistake #1: Buying a House That Costs Too Much
When you apply for a mortgage and get pre-approval, the high pre-approval amount may surprise you. You might immediately set your sights on houses at the high end of your price range as you begin to imagine the possibilities. However, once you consider property taxes, homeowners insurance and utility costs, you may find yourself house-poor as you sink a large portion of your income into your home. This is the probably the worst of the house buying mistakes you can make; you want to enjoy your new home, not merely exist in it.
Before you make an offer on a house, find out what the property tax rate is in the area where you plan to live. Remember, you may be subject to various taxes based on the value of the home. Typically, you will be facing county or municipal taxes and school taxes.
Another thing to consider is utility costs. Cathedral ceilings may look great, but they can lead to higher heating bills in the winter and higher cooling bills in the summer, whereas a smaller, well-insulated home can be quite efficient. Diane Benson Harrington of realtor.com recommends asking to see the current homeowner’s utility bills and inquiring about taxes and home insurance costs.
Once you have a general idea of what your additional monthly costs will be, you can determine whether the house is, indeed, affordable.
Mistake #2: Not Looking Far Enough into the Future
The longer you stay in your home, the more value you can get out of it. Frequent moves can be costly, and when you sell a home, you end up paying a lot in realtor fees and moving costs. The house you think is perfect for the long term now may not be so perfect two or three years into the future. The “Five Year Rule” that many financial experts, including Suze Orman, live by states that, if you do not own your home for at least five years, you are likely to lose money on it.
When you buy your first home, be sure to look well into the future and ask yourself a lot of questions. If you consider the house a starter home, will it be easy to resell? If you plan to stay in the home into your golden years, will you be able to manage it as you grow older or should you look for one with fewer stairs or a smaller yard? If you are planning to have children, does the home have sufficient bedrooms and storage space? Will you be able to afford to keep the house if you or your spouse decides to stop working to stay home with the kids?
A number of situations can make a house that is perfect now into one that just doesn’t work in a matter of years, so be sure to consider the future.
Mistake #3: Not Putting 20 Percent Down
One of the biggest house buying mistakes first-time home buyers make is buying a house when they do not have enough funds to put at least 20 percent down on it. When this happens, mortgage companies see you as a bigger risk and will require you to pay private mortgage insurance (known as PMI) until such time as you have paid 20 percent of the principal.
According to Zillow.com, lenders usually base PMI payments on your loan-to-value ratio, which typically ranges from $30 to $70 for every $100,000 borrowed. Therefore, if you buy a $200,000 home with only 10 percent down, you may end up paying an extra $100 a month for the first several years. This money does not go toward your principal or interest. An exception is with VA loans, which require zero percent down and do not charge mortgage insurance.
You can easily avoid this problem by simply saving enough for a sufficient down payment before you buy a house. Not only will the larger down payment result in lower monthly mortgage payments, but also you will likely qualify for a better interest rate and will avoid throwing money away on PMI.
Mistake #4: Getting into a Bidding War
If you attach yourself emotionally to a house you are thinking of buying, you may find yourself letting your emotions take over your rational thought. If someone else is interested in the same house, you may find yourselves in a bidding war.
This happens when each prospective buyer tries to outbid the other with the intention of making the winning bid and getting the home. The only winners in these cases are the seller and the realtors. You may end up paying too much money for your home, and there are no guarantees that you will even still “love” it in a few years, at which time it will be difficult to make a profit on your investment.
Do not allow your emotions to come into play when looking for a house. Rather than looking for a house that you love, look for one that you really like. Many of the things you may love about a certain house are merely cosmetic – things you can do to another house that you might consider. Before bidding on a house, follow the advice of Sabah Kirimi of U.S. News and World Report to “separate your emotions from the decision.”
Mistake #5: Not Having a House Inspection Done
Many problems with a house can be difficult to notice or easily hidden. You should not rely on the word of a realtor or seller about potential problems with a house you are considering. These people are not necessarily dishonest; they may simply be unaware.
You may feel that you are saving money by not paying the few hundred dollars that a thorough house inspection will cost. However, if you sign a purchase agreement without having an inspection done, you run the risk of finding yourself stuck with a house that may become a financial drain as you do repairs.
When you make an offer on the home, always specify that the purchase is contingent on a positive report from a home inspector. Be sure to hire a well-recommended inspector, certified by the American Society of Home Inspectors. According to Jane McGrath of TLC, this inspection “should include the overall foundation and structural features of the house, plumbing, the presence of mold or pest infestations, heating and air conditioning, as well as the electrical system.”
Mistake #6: Not Checking Out the School District
When you buy a home, regardless of whether you have children, you will be paying school taxes. If you do not have children and do not plan to have them, you may want to live in an area where school taxes are relatively low. However, if you are a parent or a parent-to-be, you may want to be sure that you are buying a home in an area that offers good, solid schools; otherwise, you may find yourself spending extra money on private school tuition in order to ensure that your children receive a solid education.
It is easy to research school performance and tax rates online. Be sure to check out all the neighborhoods you may be considering before you start looking at houses.
Mistake #7: Compromising on the Things That Matter Most
It is highly unlikely that you will ever find a house that meets every requirement on your wish list. You will therefore most likely find yourself in a home that is lacking in some things you may have wanted such as a first-floor laundry room or a deck.
When drafting the list of things you are looking for, however, there will be a few must-haves. For example, if you are planning to have children, a house with at least three bedrooms will be a must-have. If you plan to retire in the home and do not want to deal with staircases, a ranch-style house may be a must-have.
While you may be willing to compromise by giving up your desire for a skylight or a three-car garage, you should never compromise on the things that appear on your must-have list. It will only lead to regret and increase your likelihood of moving within a few years.
Mistake #8: Taking on a Project That is More Than You Can Handle
You can buy a house that needs a lot of work for a great price; there is something very satisfying about taking a house with a sound structure and turning it into your dream home. However, unless you are very experienced in such things, you are very likely to underestimate the costs, time and potential problems you may face as you go about the work. You may find yourself owning a money pit.
According to Jerry Rothfeder, a contributor at This Old House Magazine, the best fixer-uppers to purchase are those that need mostly cosmetic work done, such as fixing walls, refinishing floors and painting. This type of work has a very high return on market value. Putting an addition on the home usually costs about as much as it adds to the value of the home; but if you are planning to live in, rather than sell, the house, this can be a good project to take on.
Bigger structural problems, however, can be quite costly and too overwhelming for the casual do-it-yourselfer, and you should avoid them. Rothfeder strongly recommends that you have the house inspected prior to purchasing it so that you don't face any overly expensive surprises during your renovation.