Major Mistakes to Avoid

Major Home Buying Mistakes

When to Just Say “No”

You know that buying a home is a big deal no matter who you are or how much money you have.  You’ve heard it a million times.  It’s a big deal because houses cost a lot of money and you’re going to actually live there.  So you need to do it right.  You need to be serious.

But buying a house is also a lot of fun!  It’s exciting!  A whole new lifestyle awaits you!  And this is where problems arise.  You forget the fundamentals.  You get carried away.  You forget to be serious.  Shame on you.

It happens to the best of us – the giddy schoolgirl feeling.  However, to be forewarned is to be forearmed.  In order to help you avoid acting like a giddy schoolgirl and making a big mistake, we’ve drafted this helpful list of potential pitfalls that could ruin your home-buying experience.  You can print it and take it with you anywhere.

Mistake #1:  Not Getting Pre-Qualified for a Mortgage

Listen, if you don’t get pre-qualified for a loan before looking at houses, you’re just not serious.  Even worse, other people will think you’re not serious.  They will roll their eyes when you’re not looking.

Before you go look for a house, you need to know how much you can spend.  Getting pre-qualified for financing will establish your price range and keep you from being turned down after you fall in love with a home (see Mistake #10).  Furthermore, in times of rising interest rates (like now), it will benefit you to lock in a lower rate.  This could potentially save you a lot of money.

Before you start the process of getting pre-qualified for a home loan, you’ll need to get copies of your credit report from the three major credit rating agencies (TransUnion, Equifax, and Experian).  Take a careful look at these to identify any inaccurate information of areas where the report could be improved.  One of the benefits of getting pre-qualified is that it gives you the opportunity to address any such issues while you still have time to do it.  After you’re under contract with a house, there won’t be much (if any) time to correct problems on your credit reports.

If you don’t know how to get pre-qualified for a mortgage, get an experienced Realtor to help you.  They’ve helped people through the very same process many times before.  And besides, the seller pays their commission, not you.

Mistake #2:  Borrowing the Down Payment

Mortgage lenders require that you verify the source of your down payment.  Whether the down payment money is in your checking or savings account, a CD or other investments, or a gift from a relative, you must be able to verify and document the source of the down payment.

Never try to borrow the down payment.  Funds borrowed from banks, credit cards, friends or other sources are not accepted by any lender and won’t work as a down payment. If you receive money as a gift, you’ll need a letter stating that is is, in fact, a gift.

If you are self-employed, don’t transfer funds from your business account to your personal account.  In most cases, that will not work either.  If the transfer takes place within 90 days of closing, the lender will want to know the source of the funds.  If the source was a business account, the funds will not be allowed.

Mistake #3:  Buying More House than You Can Afford

You need to have a thorough understanding of the monthly expenses your new home (and lifestyle) will entail.  Get help from a Realtor or financial planner if you need it.  It is crucial that you have a thorough monthly budget or you could be headed for disaster.  Owning a house that you cannot comfortably affford is called being “house poor” and it sucks is unpleasant.  You will begin to hate your house because it will own you.

Be especially careful when estimating future real estate taxes.  Most municipalities are scraping for every dollar they can get and they will gouge you an real estate taxes.  If you pay more for your house than its assessed value, your taxes are going to go up.  You need to plug the purchase price into the real estate tax formula and calculate the resulting taxes.  That’s the anount you’re going to pay, not what the present owner is currently paying.  Conversely, if you’re paying less than the house’s assessed value, do not assume your taxes will automatically go down.  The tax assessor will make you appeal your assessed value before you are granted a tax reduction.  They won’t give up a dime without a fight.  If anyone tells you otherwise, don’t believe them.

And another thing – Don’t assume your income will grow to accomodate your new living expenses.  It may or it may not.  It’s a lot less stressful if you know you can truly afford your house from the day you close.  Read our post What Can I Afford? for more details on this topic or get help from a Realtor or financial planner if you think you should.

Mistake #4:  Disrupting Your Finances Prior to Closing

Prior to closing, do not:  (1) Make any large purchases, (2) Open new lines of credit, (3) Increase debt of any kind (including credit cards), or (4) change jobs or quit your job.  If you do, your mortgage might not be approved.

Mistake #5:  Not Considering Resale

No matter how much you love your new home, you probably won’t live there for the rest of your life.  At some point, you’ll want to sell it and there’s two things you should consider before you buy it.

First, are you paying the highest price for a similar home in that market?  If so, by how much?  This could limit your home’s appreciation in market value while you own it.  You may think the house is worth the price, but you’d be surprised how hard it is to find another buyer who agrees when you want to sell your house.

Second, make sure your house doesn’t have some type of incurable defect or functional obsolescence that could hurt its value in the future.  These are things that might not bother you (like having a 1-car garage if you’re single) but could severely limit your home’s appeal when you sell it.  People get burned by this a lot.  Things that don’t seem important now turn out to be a big deal when you sell.  Be careful here.

Mistake #6:  Not Getting Multiple Mortgage Quotes

Some people really don’t like financial stuff, especially dealing with banks or other lenders.  They mistakenly believe the process will be less painful if they deal with only one lender when, in fact, the exact opposite is true.  If you approach only one lender, you don’t know if they’re any good or not because you have nothing with which to compare them.  Why not talk to several lenders?  One or two of them will look more promising.

Don’t just choose a lender because they have the lowest interest rate.  Low interest rates are good, but there are other important considerations as well.  Look at the total cost of the loan including the APR, origination fees and discount points.  Origination fees are charges by the lender for the service of creating the loan while discount points are an up-front fee to reduce the interest rate.  Ask that both be separately identified so they can be compared with other mortgage quotes.

The cost of the mortgage, though important, should not be your only criteria for choosing a loan.  Do some internet research to make sure the lender you choose is reputable in terms of delivering the loan at closing according to the cost and terms they promised.  If you get close to the closing date and the lender tries to change the deal, you won’t have time to start again with another lender unless the seller agrees to an extension (and that may come at a cost).

Adjustable rate mortgages (ARMs) can be a viable option for you if you fully understand the risks.  They’re often attractive because they give borrowers the lowest initial interest rate for a fixed period of time.  ARMs are a means of helping people afford homes that might otherwise be a bit too expensive.  But you need to realize that the period of time that the interest rate is fixed will end.  At that point, the rate will either go up or it will go down.  If it goes up and you can’t afford it, you’ll either have to refinance or sell.  That’s not just theoretical, it will happen. Many of the forclosures we see today are a result interest rate increases on adjustable rate mortgages.

Mistake #7:  Signing Documents Without Reading Them

Make sure that you have time to read every document that you’ll be expected to sign at closing.  Make time to read them at home as soon as you receive drafts of them.  Make sure you understand them and make a list of questions if you have any.  Discuss these with your Realtor and your attorney before the closing.  If there’s something you don’t like, say so.  You may be able to make changes that are more to your liking.

Real estate closings can sometime go very quickly and everyone assumes that you’ve already read the documents.  It’s assumed that you’ve already done your homework so you need to be prepared.  Pay special attention to your loan document including ARM interest rate adjustments and prepayment penalties.  Look at the closing cost estimates and make sure they’re correct.

Mistake #8:  Putting Up Non-Refundable Earnest Money

When you sign a purchase and sale agreement, you typically tender a modest amount of earnest money depending on the custom of the local real estate market.  But the earnest money is conditional.  You still have to do your home inspection, obtain financing, and perhaps even sell your present home.  You get a fixed period of time to accomplish these tasks.  If these matters don’t get resolved within the prescribed time period, there’s no deal and you get your money back.  That’s how it works.  Your earnest money only becomes non-refundable after these contingencies have been met.  After all earnest money contingencies have been met, you’ll lose the earnest money if you don’t close the deal.

However, just to be clear, you do not put up unconditional earnest money.  That’s just plain dumb and no home is worth that kind of risk.  The risk of losing that money due to circumstances beyond your control is too high.  If that’s what’s being proposed to you, just decline and move on to another property.

Mistake #9:  Not Doing a Home Inspection

You are insane if you buy a home without a home inspection.  You need to have a home inspection even if you are buying a house “as is”. You need to know exactly what you’re about to buy. Home inspections typically cost from $300 to $600 and include a check of the home’s structural compenents and mechanical systems.  You may also want to have the home tested  for termites, radon, asbestos and mold.  These may not be covered by the home inspection and, if not, will have to be tested separately.  There are companies that specialize in residential environmental matters and you should get quotes from two or three.

If the inspections and tests identify any problems, then you’ll have the option to either terminate the contract or negotiate a remedy with the seller.  Usually the seller will either fix the problem or give you a credit to do it yourself.

Mistake #10:  Falling in Live with a House

You don’t want to hear this, but there’s more than one house that will make you very, very happy.  There’s more than one “dream house” waiting for you.  (Sounds like I’m talking about something else, doesn’t it?)  When you search for a home, you’re bound to come across one that really stands out.  It will be a wonderful house in most respects.  But you can’t let the things you like about it cloud your judgement.  If you immdiately fall in love with a house, you’re likely to compromise on matters that may come back to haunt you later.  These matters may be either physical or contractual.  You must remember that there will be plenty of time to fall in love with your house after the closing.  Until then, stick to business.

Bonus Tip:  Warning About Surrounding Land Uses

If you want to buy real estate like a seasoned pro, there’s one more thing you should do.  Make sure you know about anything and everything that could potentially be built around your home.  Things you might not like.  Big roads or big buildings.  If your new home is completely surrounded with residential uses (your typical neighborhood of single-family homes), this probably isn’t an issue.  But if you see any potential for something bad to be built on neighboring land – or if you’re not sure – you should check it out.

You can investigate this by going to your local zoning office and looking at a zoning map.  See if the map allows objectionable land uses.  Tell the zoning administrator about your plans and ask him if there’s anything you need to worry about.  You can take this to the bank:  If something bad can be built on land near you, eventually it will be built.  And if it does, then you’ve got a problem.

After reading these warnings you might be thinking, “I’ll never be able to do all this!  This is too hard!  Can’t I make just one mistake and still be OK?”  No, you can’t and you shouldn’t.  It’s not that hard to steer clear of these traps if you’re conscientious and diligent.  And you don’t have to do it alone.  Find an experienced Realtor who operates in the area where you want to buy a home.  The Realtor can help guide your home search and keep you from doing anything dumb.  It’s free expert help because the seller pays the real estate commission.  If you’ve never worked with a Realtor before, take a look at our post Do I Need a Realtor? to see what you can expect.  There’s a lot of assistance available to help home buyers avoid making poor decisions, but it’s up to you to take advantage of it.