When it comes to buying a home, there are smart ways to go about it and less smart ways. Follow some of the wrong paths and you can end up spending a lot more than you need to or ending up with a home that isn't what you wanted, needed, or could afford. Here are seven homebuyer mistakes to avoid making.
1. Not knowing how much you can afford to pay.
Once you start shopping around for a new home, you'll probably end up seeing some that are out of your price range, whether you realize that or not. It's a big mistake to let yourself buy a home that will be expensive enough to have you stretched thin financially.
Some experts have advised spending no more than 25% to 30% of your gross monthly income on housing (including property taxes and insurance), but you're not necessarily well served by that broad guideline, as a lot may depend on real estate costs where you live, how many children you have, and so on. Instead, take the time to figure out just what you can afford. Total your household expenses, such as food, utilities, transportation, insurance, travel, entertainment, auto maintenance, debt payments, contributions to savings accounts, and so on -- but not your rent. Subtract that total from your household income, and you'll get a rough idea of what you might be able to spend on housing. Don't aim to spend all of that, though, as you should account for emergencies that pop up (such as a job loss or costly health issue) or other needs.
Remember that there will be many more costs once you buy your new home, such as repairs, renovations, furnishings, and perhaps a new refrigerator or a membership fee at a local club. If you're selling a home to buy this new one, you might need to spend there, too, to get it looking its best.
2. Not checking your credit report and score
Another classic homebuyer mistake is ignoring your credit score -- which lenders use to determine what interest rate they offer you. About 90% of lenders will check your FICO credit score, and the folks at MyFICO.com have a handy interactive table showing you what a difference your credit score makes in the interest rates you're offered. When I checked it, for example, it showed that if you were borrowing $200,000 on a 30-year fixed-rate mortgage, and you had a top FICO score, in the 760 to 850 range, you might get an interest rate of 3.74%, with a monthly payment of $925 and total interest paid over the 30 years of $133,076. If your score was 650, though, your rate would be more like 4.78%, with a monthly payment of $1,047 and total interest of $177,063. That's $122 more per month ($1,464 per year) and a whopping $44,000 more in interest.
It's smart to know your score, because if it's quite poor, you might choose to put off homebuying for a while, to improve your score -- by paying down some debt, paying bills on time consistently, and so on.
3. Not shopping around for a mortgage
If the first lender you consult offers a seemingly great interest rate, don't stop there. Be sure to get a handful of quotes, from a variety of sources, such as local and national banks, credit unions, and perhaps a mortgage broker or two. Read up on mortgages first and get a handle on their terminology. Being a savvy shopper might get you better rates, as lenders will know that you've done your homework.
4. Not getting preapproved
Once you select your lender and once you're ready to buy, get preapproved for a mortgage. That will make you a more credible buyer, should you end up bidding against any other buyers for a home. Note that if you've determined on your own that you can afford to borrow as much as $200,000, you'll need to stick to that, even if a bank preapproves you for a $250,000 loan.
5. Don't forgo professional help or use the wrong kind
It can be tempting to think you can do just fine checking out homes for sale on your own, making appointments with the listing brokers, and then perhaps even carrying out the purchase on your own, with minimal help from professionals. Think again, though. The listing broker may seem nice, but he or she is also serving the seller. A savvy and seasoned buyer's broker can do a lot of the legwork for you and will have some valuable guidance along the way, too, as well as experience negotiating offers. This person can help you determine what to offer, with a wealth of industry data at his or her fingertips.
Broker fees can seem steep, but some brokers may offer a lower rate, and even those who don't may be well worth their cost, preventing you from overpaying. Other professionals, such as a property appraiser, can also be worth their cost. Be sure you're comfortable with whomever you choose to work with. You might ask friends or relatives for referrals, or visit the National Association of Exclusive Buyer Agents website.
6. Not evaluating each home rationally
Another homebuyer pitfall is failing to be rational when shopping for and considering homes. Don't let some tacky furniture or appalling wallpaper prevent you from seeing rooms that, once redecorated, could serve you well. Don't get fixated on a wonderful fancy oven in the kitchen or some other very desirable factor and end up blinded to some meaningful drawbacks. Just $2,000 might get you that same stove in a better house.
Have a list of features you must have and ones you would like to have. Don't compromise on must-have features. Don't plan to find a perfect house, because you will most likely just find a wonderful one that's missing a few features you would have liked. Be sure to consider the neighborhood, too, and nearby schools and amenities. Think about how safe or friendly it seems, and how busy and perhaps noisy it is. Imagine living there.
7. Skipping the home inspection
Finally, don't fail to hire a home inspector before buying any home. A good inspector will identify any quality issues the home has, that you might end up paying for later -- such as a roof needing repair, slow-draining pipes, a cracked foundation, an outdated electrical system, and so on. This knowledge can mean that the seller will fix the problems before you buy, or that you can shave some dollars off the sales price to compensate.
Buying a home is not a simple matter, but you can proceed through it with peace of mind if you're avoiding making big mistakes. You'll probably save money, too.