If you’ve ever envisioned your own “American Dream,” it probably included your version of a dream home. Buying a house is an important and exciting financial milestone, but that doesn’t mean it’s an easy one. We often hear advice about what to do when purchasing your first home, but maybe equally important is what not to do. Let’s talk about the five biggest mistakes you can make and how to prevent them.
1. Sealing the deal on something you can’t afford
Let’s face it: We all get excited when the bank approves us for a loan with lots of zeroes at the end. However, just because you got approved doesn’t mean it’s what your household can truly afford – especially if it’s your first home. To avoid getting into a legal obligation that comes with payments that will keep you up at night, budget before looking at houses. Decide the maximum payments you can comfortably commit to and then go from there. There’s nothing worse than falling head over heels for a home just to realize you can’t actually afford it. To that end, always shop for your mortgage before looking at houses and remember to account for things like anticipated property taxes, homeowner’s insurance, closing costs and private mortgage insurance if necessary.
2. Not shopping for rates
Shopping for a mortgage is no different than shopping for a vehicle or applying for a new job: It benefits you to shop around and weigh the offers. Aside from varying interest rates offered, different lenders also have varying closing costs and discount programs available. It is often in your best interest to apply for a handful of loans and pick the one that is best for your unique situation. The best news of all? You can do this without causing excessive harm to your credit as multiple inquiries that occur within the same 14 to 45 days are only counted as a single inquiry!
3. Not taking advantage of special programs
While you certainly don’t want to make a down payment that is too small, most first-time home buyers don’t exactly have a fortune saved up for the ideal down payment along with all the other costs of purchasing a home. Fortunately, there are a plethora of special first-time homebuyer programs that can offer anything from a discount on closing costs to a mortgage credit certificate that will allow you to claim a federal tax credit to go towards the loan. Plus, not every loan requires a 20% down payment like a conventional loan, so those options are worth exploring, too.
4. Emptying your savings for a down payment
Homes are costly, there’s no denying that, but they don’t have to completely drain your life savings. A massive advantage to putting 20% or more down towards a home is that it saves you from having to pay for private mortgage insurance, which leads to significant savings each month for the duration of the mortgage. That said, if you scrape together every dollar to your name just to reach that 20%, you are leaving your finances vulnerable to unexpected costs like a medical emergency or anything your new home may throw at you. Paying for mortgage insurance isn’t ideal, but leaving yourself no cushion by exhausting emergency funds is much riskier.
5. Miscalculating the true costs of homeownership
Most first-time homebuyers started as renters, where repairs and routine maintenance are included in your set monthly rent and taken care of by someone else. This luxury goes away when you own a home and it’s important to budget accordingly. A great rule of thumb is the “Square Foot Rule,” which says to budget $1 per square foot annually for home maintenance costs. If you buy a 1,500 square foot home, then you’d want at least $1,500 set aside annually. Having a fund for those maintenance and repair items - unexpected or not - can really protect your life savings, and your peace of mind.
OMB and its affiliates do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decision.