Most homeowners aren't shy, telling you how awesome their home is and the perks of living in a house they own ... but they're a lot less vocal about the ugly aspects of buying a house and the sacrifices you make. And yes, there is ugly, and there are sacrifices. Here's what nobody is telling you about Home Buyer Mistakes to avoid.
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1) You don't need to put 20% down
In most cases and with most lenders, putting 20% down is ideal or even required.
This isn't always true. For example, the Veterans Administration (VA) offers loans for veterans without any down payment money. If your area qualifies like ours does, you can also get a rural development loan backed by the USDA, without any downpayment. The Federal Housing Administration will do loans with only 3.5% down, but buyers have to pay mortgage insurance (MI or PMI) on those loans. Their lender feels they are riskier since the buyer has less equity in the home, so buyers can expect to pay a percentage of the loan amount in PMI over the life of the loan. (Or refinance the loan once they do have at least 20% equity in the home.) There is down payment assistance available in both loans and grants, so it helps to talk to a REALTOR® and see whether they know of any programs available.
2) You do need to put new credit line plans on hold.
Your interest rate is going to depend in part on your credit score, and your credit score is going to get dinged with every new line of credit. To get the very best deal (and possibly afford more house), make sure you're not going crazy with new credit cards right before you start house shopping -- and definitely don't buy anything like an RV or car on credit! You may think you need to buy NEW furniture since you have several more rooms to fill than you did before. Be aware you may have some purchases to make on the furniture front, and budget for them if you can -- and definitely do not buy ANY on credit before the loan closes.
3) You're not locked into one particular lender
Some people think they should immediately dive into a relationship with the first lender who accepts them. There may be a better match out there for you, and if you don't shop around a little bit, then you aren't going to find it. Talk to a few different banks or mortgage brokers and ask them what their best deal is. Your credit won't get dinged by this, so please feel free to explore your options! Your mortgage will probably be sold to a servicer anyway. Most lenders sell mortgage loans to a servicing company, which will be collecting your checks for the next 30 years (unless it gets sold again, of course). Be prepared for a letter your loan has been sold to a servicer and ready to cancel any checks or payments that slip out the door at the wrong time. Most often it changes before your first payment is even paid. They have now limited this to two times during the life of the loan.
4) Your monthly mortgage payment includes more than just paying back the loan
Every month, you'll be paying your loan principal, but there's also the interest on your loan (which likely gets priority for repayment above the loan principal). You'll also be paying homeowners insurance, which is required for the lender to approve the loan, plus taxes, each month. If you're not sure how much you can afford based on all of this, it's probably not a bad idea to sit down with your lender and talk about your options. They don't want you to default on your loan either, so let them help you figure out the budget right for you. Online calculators are available for estimating your monthly payment. Most often they only include the principal and interest, so be aware of the extra cost for the taxes and insurance.
5) School districts are important even without kids
If you don't have kids or don't plan on having any, you might be tempted to ignore the school district when home shopping. School districts definitely could be very important to buyers a few years down the road when you decide to sell your house. Homes in neighborhoods with good schools tend to appreciate in value faster than homes in neighborhoods where the schools are just so-so. Make sure you're considering your future as you're shopping, which includes your future after this home. School districts are taxed differently so this could also affect your property taxes.
6) You don't need to spend your entire pre-approval amount on the home
It's tempting to buy at the very top of your preapproved price range but remember you're going to have to pay interest on the entire amount over many years, and don't forget about the other costs of owning a home. Experts suggest that you spend no more than 30% of your household income on your mortgage, so if the amount you're spending is creeping beyond one-third of your household income, that could be tough to meet. Don't overextend yourself! Consider possibilities of one of the spouses passing away or becoming incapacitated. You'll look at homes out of your price range (and crave them). You will not be able to refrain from looking at homes just above your ideal price range and thinking about how nice it would be to buy instead of the disappointment you walked through last week. What's worse than living in a house that you might need to fix up a little bit? Living in a really nice house that you can't afford and having to sell it -- or worse, go through a foreclosure. It's better to focus on what you can afford and avoid FOMO.
7) You may get outbid, more than once
Some markets are hotter than others and have more cash buyers, which can be devastating if you're using a loan and can't pay cash for a house. Sellers often opt for cash buyers because the closing process is less likely to fail, and it can be hard for buyers to experience bid after bid rejected by the seller. Stay strong and have faith that your house is out there. It might not be a smooth road, but you will get there.
8) Agents get paid on commission
Real estate agents typically don't get paid until the closing table, when the house is officially yours. The title company will cut a check to the agents once the payment is processed, and the deed is signed. This is because we are paid on commission, based on a percentage of the sale. If you have an agent who isn't upfront with you about how payment works or is trying to talk you into more house than you can really afford, then you may question whether your agent is really the best fit for you. You want someone honest who will protect your interests.
9) Talk to a contractor before closing
The inspector might identify some issues which need to be repaired to ensure safety and quality, and often this is negotiated with the seller. To be entirely sure that you understand what will be involved and how much it will cost, it's a good idea to get a contractor and go over the inspection report. Some offer free consultations, and most will be able to give you a ballpark figure. Remember, you'll be on the hook for any and all home repairs. The nice thing about renting is that when something breaks, the landlord will fix it. You don't need to worry about how much the new sump pump or heater costs. All of that burden becomes yours and yours alone when you become a homeowner. The drain is clogged? The water heater won't heat? If you don't fix it, or arrange for someone else to fix it, then it's staying clogged and cold.
10) Speaking of closing
It costs money to buy a house, and closing costs can be charged to by the buyer or the seller. This is usually outlined while negotiating the contract. Clarify with your agent and lender who is responsible for closing costs and make sure you've got the money available. Unfortunately, many of the loans available with no down payment have very high closing costs. Conventional (20% down) usually are pretty low costs and VA/FHA/RD loans can be as high as 6% of the sale price. This can be something a buyer asks a seller to pay for at closing, but most often they are wrapping these costs into their loan, if they haven't saved up for them already. There are grants available for these costs also.
11) Those nearby empty lots won't be empty forever
Everything changes, and some places change more quickly than others. you cannot take it for granted that the rolling (empty) hills around your brand-new pride and joy are going to remain empty, unless you happen to own all the land, too. It's not a bad idea to stop in at your city or county offices and ask what they know about any development plans or zoning for the area, and then keep tabs on things once you move in. Many times, neighboring lots can be purchased to ensure no one will build RIGHT next door to you. You will have the additional tax burden, but it may give you peace knowing things will stay quiet.
It might take a while to feel like "home" in your new place. You'd think that once you've gone through all of this trouble for a house, it'll automatically "feel" like yours ... but that's not necessarily true. It may take a few weeks or even months before you start settling in and feeling like a homeowner. If the words "this is my house" don't roll off your tongue quite like they should in the beginning, take heart: You'll be claiming it without thinking about it before you know it. Now that you are familiar with Home Buyer Mistakes, check out this video Questions to ask a mortgage lender. Thanks for reading and have a blessed day!
