I am an investor who has turned my life around by getting out of debt, reading books and taking courses on financial education.
Buying a house is one of the most important decisions you will ever make. It can be an exciting and rewarding experience, but it also comes with a lot of responsibility.
Whether you are buying your first home or upgrading to your dream home, there are many things you need to know and understand before making this big purchase.
The following tips will help you avoid some of the most common mistakes people make when buying a house.
1) How Much Can You Afford?
This is the first question that you need to ask yourself when thinking about buying a house.
Your monthly income will determine how much of a mortgage you can afford, which will in turn determine how much house you can buy.
A house is the biggest purchase that you will make in your lifetime, so it's important to make sure that you can cover the mortgage payments and property taxes.
There are many different types of houses available in the market, but not all homes are within your budget range.
You may want to start by researching what type of housing would best fit your needs and what price range it falls into, so that you can narrow down your search listings that fit into that price range.
2) Location, Location, Location
The location of the house you are buying should be your second consideration.
There are many factors to take into account when deciding on the location.
What is the commute like?
Is there good public transportation?
Is there a nearby school district?
Is it close to shopping or entertainment options?
Is this where you want to live for the foreseeable future?
These questions, and more, will help you decide if a particular house is worth buying.
3) Getting Pre-Approved For a Mortgage
Getting pre-approved for a mortgage is a good way to ensure that you are financially ready to buy a house.
You should get pre-approved for your mortgage loan, before you start looking for homes, in order to avoid wasting time on homes that won't work for your financial situation.
But remember, getting pre-approved doesn’t guarantee that you will get a mortgage.
4) Do You Qualify For a Mortgage?
You need good credit if you want to get approved for a mortgage with the best interest rates.
Lenders have different guidelines when it comes to qualifying for a mortgage.
Different variables can factor in, such as the borrower's income, employment status, debt load, credit history, and other financial information.
Lenders will also assess the value of the property being mortgaged as well as the cost of living in that area.
5) You Don't Need 20 Percent Down Payment to Buy a House
Most lenders will let you put down as little as 3 percent, but there is a catch, and it's called PMI.
Private Mortgage Insurance, or PMI, is a type of insurance that covers the mortgage balance in the case that you default on your loan. It typically covers up to 80 percent of the mortgage balance in the same way home owner's insurance would cover up to 80 percent of your house if it burned down.
The lender requires you to pay the PMI when you have a conventional mortgage with a down payment of less than 20 percent of the home's purchase price.
This type of mortgage insurance doesn't guarantee your ability to make your monthly payments, it only protects the bank in case you do not.
Some lenders will let you buy a house with no down payment, which is the case for special financing options, such as the VA loan, which is a government-backed mortgage loan.
VA loans are only available to military veterans, active duty military and military spouses.
Then we have the FHA loan, which is also backed by the government, and has lower financial requirements. The minimum down payment is either 3.5 percent or 10 percent, depending on your credit score.
For the FHA loan you are required to pay a mortgage insurance premium (MIP), an additional fee that protects the lender in case you default on your payments.
6) What Should Be In Your Contract With The Seller?
A contract is a legal agreement between two or more parties which ultimately defines the responsibilities of each party involved.
It includes the terms and conditions for buying and selling the property.
Here, you can negotiate anything before buying.
When buying a home, the contract is an essential document.
The seller and buyer should evaluate the condition of the home and identify any potential issues. They should also negotiate with terms that are mutually beneficial for both parties.
The contract should outline what is being sold, and at what price, as well as details such as title transfer, closing dates, inspection periods, timelines for repairs and costs for extra items, such as furniture and appliances.
7) Do You Have Enough Money Saved Up For The Down Payment/Closing Costs?
One of the most important steps to take before looking for a new home is to make sure you have enough cash saved up for the down payment and closing costs.
The down payment is often the largest payment in a home loan, other than the monthly mortgage payments.
The down payment is typically 5-20% of the purchase price.
The closing costs are typically 2-5% of the purchase price and include items such as attorney fees, title insurance and more.
8) Careful Not to Be House Broke
Owning a house can be quite the expensive venture. This is particularly true when you buy a home for the first time.
Before you officially agree to buy, take a moment to consider what you'll spend for maintenance, repairs, utilities and amenities for the house.
For example, monthly utility costs and HOA (homeowners associations) are one of the most unanticipated expenses homeowners will have to face.
You should make sure that you have enough money to cover those expenses as well.
9) Don’t Pass a House Just Because Of Little Cosmetics
A lot of home buyers are throwing away good opportunities because they don't want to spend money on easy and inexpensive cosmetics repairs.
When you're shopping for a house, don't pass up a great deal on a house that needs a little cosmetic work just because it doesn't look perfect.
You may be tempted to keep driving past a house that has a lawn that needs to be mowed and some peeling paint, but don’t. That house could be the perfect house for you and your family.
Instead avoid homes that require major repairs and renovations
You should always see the full picture when considering a home to buy.
You may be attracted to the location of the house, but if there are major repairs or renovations needed, that would take up most of your time and money, it might not be worth the investment.
10) Never Waive The Home Inspection
It is not uncommon for a potential home buyer to waive the home inspection.
However, it's important to always have one done because it can reveal hidden issues within the property that could have been missed during previous inspections, or the issues may even not be known by either party before purchase.
The home inspection is not something that should be waived. It's better to be safe than sorry.
The inspection helps identify problems with the home and provides a blueprint for what needs to be done in order to fix these problems.
It can also be used as leverage to lower the house price or have those problems fixed by the seller.
11) Avoid Mortgages With An Adjustable Rate
When it comes to mortgages, the best thing to do is shop around and compare different offers before signing anything.
You should also be aware of what type of mortgage will work best for your needs, but whatever you do, stay away from an adjustable rate mortgage (ARM).
When you sign up for an ARM, you lock in a low interest rate for a few years. After that, the rate could increase dramatically at the market rate.
If the interest rate goes high, so are your mortgage payments, and when that happens, you may have trouble paying it.
This could even lead to serious problems such as a foreclosure and bankruptcy.
The interest rate on 3-year or 5-year ARMs is not set in stone and it will fluctuate according to the market.
When you get an ARM, you’re taking a gamble. Why risk not being able to pay your mortgage?
Instead, play it safe by taking out a fixed-rate mortgage.
The process of buying a house can be daunting and confusing. There are many things to consider before making the commitment to buy.
Buying a house is an important decision and it should be made with care.
You want to avoid the many common mistakes that people make when buying a house.
Some of them are not even mistakes per se, but rather just things that people should be aware of before making the final choice.
We hope that this article provided you with some good tips to help you make the right decisions when purchasing your dream home.
- 7 Things to Know Before Buying a House, by Barbara Marquand, Nerd Wallet
- 10 Things You Absolutely Need To Know About Buying A Home, by Kelly Phillips Erb, Forbes
- 21 Surprising Tips You Need to Know Before Buying a House, by Andrew Herrig, Wealthy Nickel
- How to buy a house in 2022, by Jeff Ostrowski, Bankrate
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2022 Alex Farris