6 foolish mistakes first-time home buyers make
6 foolish mistakes first-time home buyers make: November 23, 2014
Based on an article by
Erika Rawes, September 14, 2014
Buying a home is exciting, especially when you're buying for the first time. In the midst of all of the excitement, it's easy to become blinded by beautiful back-splashes, granite and quartz counter tops, hardwood floors, and fenced-in backyards. While looking at homes that are completely perfect from top to bottom, you may begin to rationalise a larger purchase than you had originally planned for — "This house is perfect for me; it's worth $50,000 extra dollars for me to have a house with enough space in a perfect location," or "We were planning on spending a little bit of money on painting; we can spend $50,000 extra on this house because it doesn't need any work."
1. Overspending
Before you even look at a single property, you need to know exactly how much you can afford. There are several online calculator tools you can use, but these tools are only estimates. Use these tools as a guide, but then adjust the amount based on your individual situation. How much is your current rent payment? Did you meet that payment each month with ease, or was it a bit of a struggle each month? The payment you can afford right now is a good indicator of what you'll be able to afford in your new home.
Meet with a lender and get pre-approved for an amount you can afford. Also, keep in mind that it's always better to lean towards a lower amount, rather than a higher amount. You do not have to use the entire amount you're pre-approved for. Once you know how much you have to work with, then and only then should you start your house hunt.
2. Counting chickens before they hatch
When determining how much mortgage you can afford, base this amount on what you are earning today. That is, the income that you and your spouse earn from stable sources. If you're in your last year of law school, for instance, don't assume that you will be earning much more money in a year or two, so you can afford a larger payment. If your wife is expecting a big promotion, don't base your mortgage payment off of her potential salary increase. No one can predict the future, and although you may very well be in a better financial situation a year down the road, there is no guarantee.
3. Failing to account for closing costs, property taxes, HOA, and homeowner's insurance
When you rent a home, you generally only have one payment — rent — and then maybe renter's insurance, which is optional. When you buy a place, your mortgage payment is only the beginning of an array of costs. For instance, if you buy an apartment, then you need to factor in body corporate fees which can soon add up over the years; then there are property rates, water rates, repairs etc etc.
Then on top of all of those costs, if your deposit is less than 20 percent of the selling price, you may end up paying an additional cost — lenders mortgage insurance (LMI) — which is basically insurance for the lender in case you default on your loan. This can be quite steep depending on how far away you are from that magic 20%.
4. Failing to protect yourself with home inspections, contingency clauses, etc.
During your house hunt, you may find a house that looks great at first glance. Then, as you walk through a few of the rooms, you notice problems with the house — maybe the floors squeak or the kitchen island is off-centered. After walking through the house, you come to realize that someone simply put lipstick on a pig, and this house is in questionable shape.
Home inspections provide you with some protection. The inspector will be able to find problems that you can't and you want to know these problems before you sign on. "The seller isn't likely to tell you there's mould in the basement or the walls are poorly insulated,"
Contingency clauses also offer a form of protection. "A mortgage financing contingency clause protects you if, say, you lose your job and the loan falls through or the appraisal price comes in over the purchase price. Should one of these events occur, the buyer gets back the money he used to secure the property. Without the clause, he can lose that money and still be obligated to buy the house," explains Justin Lopatin, a mortgage planner
5. Being too naive or too paranoid
Some first-time home buyers are naive. Overly optimistic, they think nothing could possible go wrong. If a home has a few problems, they view them as easy fixes and are unrealistic when it comes to the cost and time it takes to fix up the home. Some naive buyers will move to a neighborhood on the wrong side of town, forgetting that you can fix up a house, but you can't change your neighborhood or location without moving.
Paranoid buys are sometimes difficult to work with. They may not believe the price is an accurate assessment of the house's market value. They'll submit low-ball offers and then show frustration when they are consistently rejected. Paranoid buyers don't trust real-estate agents, and may even try to buy their home without an agent, which is generally an unwise choice.
6. Not sharing the load
Of course, there is always co ownership…sharing the purchase and ownership of the property. This effectively gives you greater opportunity to purchase a better property helping to increase your capital appreciation. It also allows you to split all costs which takes the pressure off home ownership. Always cover yourself with a legal co-ownership contract. Home Addressed has one for you to purchase. $800…split the cost. Buying with someone will accelerate your opportunities allowing you to get your home sooner rather than later, so why wait when you don't have to?