Buying a home is a big deal, both emotionally and financially. For many people, homeownership is still an essential part of the American dream. And, of course, it’s the biggest investment some will ever make.
But many times real-life home buying isn’t the same as the 1-2-3, in-and-out, fun-and-done experiences portrayed on reality TV shows.
In the midst of the thrill of the search and daydreaming of the perfect home and how your family will fit into it, some things can go wrong.
You could improve your chances of getting it right by taking a proactive approach from the beginning of your search to the day you sign on the dotted line. When you’re ready to take the leap, here are five home-buying mistakes you might want to avoid:
Not Getting Your Finances in Order
Before you start browsing online listings or get your heart set on a certain neighborhood, it might be a good idea to contact a lender (or lenders) to prequalify for a loan. You’ll provide basic information about your debt, income, assets, etc., and they can give you an idea of how much you can borrow.
Mortgage prequalification isn’t a commitment for the lender or buyer—it’s just a first step. If you appear to meet a lender’s standards, you could move on the pre-approval stage submitting income and asset documentation for a more in-depth review of your finances.
Once the lender approves your official loan application, you’ll receive a conditional commitment for a designated loan amount—called a pre-approval letter —and have a better idea of what your loan terms will be. Mortgage pre-approval can help demonstrate to sellers that you’ve completed the first step in getting a mortgage because your credit, income and assets have already been reviewed by an underwriter, and that could give you an edge.
Not Being Realistic about What You Can Afford
The lender you choose will tell you the maximum amount you’re approved to borrow for a home, but you don’t have to use every penny of that money. It’s important to keep other factors in mind, including:
Will your new mortgage payment fit comfortably into your monthly budget? You may have to make some tradeoffs—less travel, shopping, or dining out—if your new payment is higher than your current rent or mortgage payment. Not sure if you’re ready?
If you have some idea of what your new payment will be, you might want to try living with it for a few months before actually committing to a loan. You could put the difference between old and new into a savings account to see if the new payment is within your budget and, as a bonus, save some money in the meantime.
Your mortgage might not be the only expense that goes up. If you’re buying a bigger place, you may have to pay more for utilities—especially if you’ve been a renter and some of those costs were included every month. If the home has a lawn or pool, you might have to maintain them or pay someone else to do it. Or you may have a homeowner association (HOA) fee.
You’ll also have to purchase homeowner’s insurance and pay property taxes . You can get some idea of what those costs will be by searching for homes online—but you might want to hit some open houses as well. It may help you set some priorities (are you willing to give up a bathroom to get a bigger kitchen?), and you could talk to the Realtor to get information about HOA fees and other expenses.
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Digging Too Deep for a down Payment
If you have to drain your emergency savings to manage the down payment on a home, you might want to dial down the amount or wait and save up a bit more. Consider what could happen if the home needs a costly repair or, worse, if you or someone in your family suddenly has an expensive medical bill. That’s what an emergency fund is for.
The same thing holds for taking money from your retirement savings. The IRS allows first-time homebuyers (IRS defined as not owning a primary residence in the past 2 years) to withdraw money from an IRA penalty-free , but you’ll still pay federal and state income taxes on the money—and lose out on the growth you’d possibly have if you left those funds alone.
If you have a 401(k), you could take a loan against those funds, but again, there are consequences . There may be a provision in your plan that prohibits you from making additional contributions until the loan balance is repaid, you’ll miss out on any growth, and you may be required to pay back the loan immediately if you quit or lose your job . If that happens, the money you borrowed will become fully taxable and may be subject to a 10% early withdrawal penalty .
There are benefits to putting 20% down on a home: You’ll avoid paying private mortgage insurance (PMI) and your monthly payments will be lower. But 20% isn’t required. For example, The minimum down payment required for a conventional loan is 3%, and for an FHA loan, it’s 3.5%. According to the National Association of Realtors’ Profile of Homebuyers and Sellers , overall, buyers made a median 13% down payment in 2018, and first-time buyers put a median 7% down.
With all the other costs you could be looking at as you move into a home—closing costs, utility deposits, moving expenses, decorating, and more—your down payment amount is something to consider if you want to avoid getting in over your head.
Passing on a Full Inspection
It may be tempting to waive the home inspection when you’re trying to buy the home of your dreams—whether it’s to save on this extra expense or to make your offer more appealing to the sellers.
A quality home inspection might reveal critical information about the condition of a home and its systems—from electrical problems to hidden mold to a leaky roof. And your inspection report might serve as a useful negotiating tool: You could use it to ask for repairs or to work out a better price from the seller. And if you aren’t happy with the inspection results, you may be able to use it to cancel the offer to buy.
Letting Your Emotions Get The Better of You
Home buying can be a roller coaster, so it’s important to prepare yourself psychologically as well as financially. If you’ve ever talked to someone buying a house, you know there are potential pitfalls all through the purchasing process.
You might fall in love with the perfect house and find it’s way over your budget. You might get annoyed with the sellers or their realtor, especially during the negotiation process. You might disagree with your spouse or a co-buyer about priorities.
Loan Satisfaction is Important
When you’re ready to line up your financing, the loan terms you get could be nearly as significant as your home’s location as far as long-term satisfaction.
You might want to look at more than just your monthly payment and consider the interest rate, the length of the loan, and other factors that make one lender a better fit than another.
With a SoFimortgage loan, for example, the prequalification process is quick and easy—it takes just minutes and it costs nothing. And with SoFi, you can put as little as 10% down on a home, with no hidden fees.
Buying a home, whether it’s your first or your fifth, is seldom accomplished without a few stressful days and sleepless nights . But you might be able to make things easier if you do your research, work with professionals, and make sure your financial plan is in place before you throw yourself into a serious search.
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