Whether you’re part of the 1% or the 99%, a home is likely the single biggest purchase you’ll ever make.
Unfortunately, plenty of people make dumb mistakes when buying a home — mistakes that can cost tens of thousands of dollars in extra interest or, worse, saddle you with a home you can’t afford and can’t unload.
Following are examples of dumb moves that homebuyers make year after year. Read on so you can avoid them.
Dumb move No. 1: Ignoring your credit score
Your credit score can make or break your mortgage interest rate.
You see, lenders save their best interest rates for homebuyers with the best credit scores. They know that people with great scores will almost certainly pay off their home loan in full.
Meanwhile, if your credit score is hovering somewhere in the 600s or below, lenders get nervous that you’re going to bail. If they give you a loan, they will generally charge you more in the form of a higher interest rate.
If you test out Money Talks News’ free mortgage search tool, you can get an idea of what interest rates lenders would actually offer you based on your current credit score. You can also see the interest rates that lenders would offer you with a higher score — which could save you five figures.
Here’s how. Say you’re buying a $300,000 home and make a $50,000 down payment. A 30-year mortgage with a fixed interest rate of 4% will cost more than $179,000 in interest payments over the life of the loan.
But with a rate just one percentage point higher — 5% — you’d spend about $233,000 on interest. That’s about $54,000 more than if you had got the lower rate.
Don’t make the mistake of ignoring your credit score before house shopping. If it’s stuck in the basement, boost your credit score fast so you can borrow at a more favorable rate.
Dumb move No. 2: Not getting preapproved for a home loan
Some people use the terms interchangeably but getting preapproved for a mortgage is different, and better, than being prequalified.
With the preapproval process, a lender thoroughly examines your financial situation. As a result, the lender can tell you how much money you may borrow. The prequalification process, on the other hand, involves a limited review of your means and results only in an estimate.
Another bonus of preapproval: It can give you an edge if several people are placing offers on the same property.
Dumb move No. 3: Falling for an expensive loan
Be realistic about what you can afford versus what the bank says you can afford.
Borrowing up to the bank-approved limit may stretch your finances and set you up for a catastrophe in the event of a job loss or injury. Consider shaving at least 10% off the bank-approved amount and use that as your maximum price when house hunting.
Be wary, too, of falling into the trap of signing up for a riskier loan, like an adjustable-rate or interest-only mortgage. These are complex financial instruments and can be difficult to understand. They begin with low payments, but the interest rate adjusts later on and can take your payments skyward.
A fixed-rate mortgage, on the other hand, gives stability, security and peace of mind.
Dumb move No. 4: Going with an inferior (or no) agent
For most people, it’s a mistake to go it alone through the home-buying process.
A good agent can direct you to hot properties entering the market, connect you to competent lenders and inspectors, and generally smooth out bumps that may arise.
This isn’t the time to use your brother’s friend’s uncle as a favor. You’re making a major purchase, and you want a proven professional on your side. I’ll admit to using the friend of a relative for our first home purchase. It wasn’t a disastrous mistake, but I think we could have done better with someone more experienced.
If you really can’t bear to pay a commission to an agent, at least get a real estate lawyer to help draw up your offer and look over paperwork before you sign on the dotted line.
Dumb move No. 5: Buying based on emotion rather than reality
Some people see a house they love and their planned budget goes out the window. Others find a home within their budgeted price but don’t think about all the extras that may come along with it.
A pool needs to be maintained. A huge lawn must be mowed. And a homeowners association will not only demand annual fees but also your undying loyalty to their bylaws.
Before buying a house, ask yourself these questions to make sure your purchase is a rational decision:
- Can I comfortably afford this house?
- Can I comfortably afford the taxes on this house?
- Can I comfortably afford to maintain, heat and cool this house?
- Can I pay for renovations if needed? Will my desired additions or improvements be allowed by the HOA and local zoning ordinance?
- How long do I envision living in this house?
- Do the rooms and layout make sense for our family?
- A (hot tub, outdoor kitchen, fill-in-the-blank) is a great feature but, realistically, will my family use it?
Dumb move No. 6: Skipping an inspection
Part of the problem with buying on emotion is that it can lead you to make other dumb mistakes, like skipping a home inspection.
Regardless of whether you’re buying new construction or a historic home, you need to have it inspected before finalizing the sale. Don’t trust your own judgment. A professional will be able to point out possible code violations, safety threats and structural damage.
To make the most of the inspection, try to walk through the house with the inspector so they can point out potential problems and you can ask questions.
An inspection can lengthen the home-buying process, but it’s worth any inconvenience. The alternative may be finding out after moving in that your house has a costly or dangerous problem.
Dumb move No. 7: Forgetting to have a back-up plan
Think ahead as you go through the home-buying process. What will happen if, for example, the home inspection shows that the beams in the basement are rotting? Do you have a Plan B?
Hopefully, you’ve avoided mistake No. 4 and have a good buyer’s agent who entered a clause into your offer ensuring that you will get back any deposit in the event the inspection doesn’t go well.
You’ll also need a back-up plan in case the house doesn’t appraise as expected, or if you were counting on funding through a particular loan program that doesn’t materialize.
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