Whether you’re part of the 1 percent or the 99 percent, 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 you 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 seven 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 for it 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 right now based on your current credit score. You can also see the interest rates that lenders would offer you with a higher score — which can save you five figures.
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 percent will cost more than $179,000 in interest payments over the term of the loan.
But with a rate that’s just one percentage point higher — 5 percent — you’d spend about $233,000 on interest. That’s about $54,000 more than you would spend if you had gotten 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
Getting preapproved for a mortgage isn’t the same as being prequalified, although some people use the terms interchangeably.
The preapproval process entails a lender thoroughly examining your financial situation. As a result, the lender can give you a figure for the amount of money you can borrow. The prequalification process, on the other hand, involves a limited review of your means and results in an estimate.
Another bonus of preapproval: It can give you an edge if multiple people are placing offers on the same property.
Dumb move No. 3: Falling for an expensive loan
Be realistic about what you can actually 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 major catastrophe in the event of a job loss or injury. Consider shaving at least 10 percent off the bank-approved amount and use that as your maximum price while house hunting.
Also, be wary of falling into the trap of signing on to a risky loan, like an adjustable-rate or interest-only mortgage. These loans might start out with low payments, but the interest rate is liable to adjust later on, taking your payments skyward.
A fixed-rate mortgage, on the other hand, gives you 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 any bumps that may arise.
This isn’t the time to be nice and use your brother’s friend’s uncle as a favor. You’re making a major purchase, and you want a proven professional to walk with you through the process.
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 the 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
What happens if, for example, the home inspection shows the beams in the basement are rotting? Do you have a Plan B?
Hopefully, you’ve avoided mistake No. 4 and have a decent buying agent. That person should have entered a clause into your offer that ensures you get back any deposit in the event the inspection doesn’t go well.
You’ll also need to have a back-up plan for what happens if the house doesn’t appraise as expected or if you were counting on funding through a particular loan program that doesn’t materialize.
Does anyone want to fess up to making one of these mistakes? 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.
How about you? What’s your experience buying a home? Share with us in comments below or on our Facebook page.
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