It’s not just first-time buyers who make mistakes when buying a new abode. It’s easy to overstretch financially or to overlook something you shouldn’t when you see a new home you’d love to own.
From buying furniture for a home you don’t yet own to presenting an earnest money deposit check that’s not in your name, real estate and loan professionals have seen buyers make common mistakes all the time.
Here are 11 home-buying mistakes and how to avoid them.
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1. Assuming that buying is always better than renting
Depending on how long you plan to stay in your home, buying may not be the best option. Roger Ma, a certified financial planner and licensed real estate agent, told LendingTree that the decision to buy or rent really depends on your specific circumstances and your timeline.
“One of the biggest factors is your estimated time horizon,” he said. “The rule of thumb that real estate agents use is that if you expect to live in an area for five to seven years or less, it might actually be better for you to rent considering all of the closing costs.”
For anything under five years, he added, you don’t really give yourself that much time for the property to appreciate and to overcome some of those costs. On the other hand, if you’re set on living in an area for more than just a few years, it may be beneficial to buy.
Check out the LendingTree Rent vs. Buy calculator to help find out which option makes more financial sense in the long-term.
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2. Buying more home than you can afford
When you get preapproved for a mortgage, a lender will typically tell you how much of a loan they might approve you for. That doesn’t necessarily mean you should use that figure as a target price, however. This can set buyers up for disappointment, and even financial difficulty.
According to real estate expert and investor Brian Davis, one mistake he’s seen a lot of homebuyers make, particularly first-time home buyers, is framing affordability as the question “What’s the absolute highest price I can afford to pay for a home?”
“Instead, a buyer should set a target savings rate and work within that budget,” he said. “Then, they should ask themselves, ‘What’s the least expensive home I can be happy living in?’”
If you want to see how much house you could comfortably afford, use our Home Affordability Calculator.
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3. Not considering all of the costs involved
It’s not just the price of the home that a buyer should factor into their budget. In Ma’s experience with clients, he has found that many people save up enough for the down payment, perhaps 20 percent, but they might not have enough for the closing costs that must be paid at the end or enough funds to live on after closing.
“Many clients don’t have enough savings to retain an emergency fund for up to three to six months after they close on a home,” said Ma. “They might think about the mortgage payments and things like that, but if you live in a multi-housing building like a condo or co-op, there are HOA or maintenance fees associated with that.”
Ma also pointed out that things break all the time: “You might have to paint your house or fix your dishwasher, and all those monthly costs add up.”
If paying for closing costs and leaving some emergency funds in your savings account means putting down less than 20 percent, it could be a fair trade-off. Yes, you may end up paying private mortgage insurance as a result, but you mitigate the risk of running out of savings and having to turn to high-interest debt as a result.
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4. Not considering your lifestyle
When buying a home, it’s important to think beyond just the house itself. For example, does the location mean that you will have a longer commute, and are you comfortable with that? If you like nightlife, are you close enough to the city, or will you feel isolated in your new home? Are you close enough to family and friends? No house will provide absolutely everything that you want, so it is a good idea to prioritize what factors are most important to you and your lifestyle.
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5. Thinking of a home as an asset or an investment
Yes, your home is an asset, and hopefully, one that will increase in value over time. But, according to Davis, it’s also an expense.
“According to a net worth audit, technically your home is an asset, but it’s an expense, and it may or may not ever appreciate,” he said. “Thinking of a home as an ‘asset’ or ‘investment’ just helps buyers justify spending more than they should.”
Homeowners learned this the difficult way in the wake of the 2008 housing crisis when many were left underwater on their mortgages. It was especially damaging for homeowners who had treated their home as a nest egg. Things have certainly improved since then — home prices have increased by more than 42% nationwide since 2009. However, that trend is predicted to level out soon, according to Freddie Mac.
Carefully consider where you purchase a home and do some research to see how home values have changed in recent years to get a sense of the local trends. And, of course, consider your home as one of a variety of investments you’ll make along with a 401(k) or an IRA, not the only investment.
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6. Changing jobs or becoming self-employed
Changing employers during the loan qualification process is a mistake that can quickly jeopardize your ability to secure a loan — yet, according to mortgage loan originator Chad Vincent Hubert, “this is the biggest mistake I see home buyers make.”
Unless you can document a two-year work history prior to leaving your job with pay stubs or a W-2, or you have been there for six months at least, a lender will balk at your application. It doesn’t necessarily mean the nail in the coffin of your homeownership hopes, but be strategic if you’re looking to take a new job in the midst of the lending process. Be sure to communicate this to your loan officer and supply any additional documentation they may request.
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7. Not keeping a paper trail for cash gifts
You might be lucky enough to receive a windfall or a cash gift that you want to apply to your down payment before the closing — but this can become a logistical minefield if you don’t keep a careful record of where the funds came from.
“Large cash deposits that the buyer wants to apply to their qualifications cannot be documented if we can’t prove the source for those deposits,” said Hubert. “These deposits basically have to be backed up by bank statements.”
Transferring money between multiple bank accounts in the closing process is another big mistake, according to Hubert — “This creates a paperwork nightmare, and there’s no reason to do it.” Even something as seemingly innocuous as opening a new credit card or bank account can throw your application out of whack, as it can interrupt the careful process of underwriting your loan.
Hubert explained that if you open a new bank account, the loan officer must document the source of the funds used to open the account.
“In a perfect world, if you went to Chase Bank, withdrew $5,000, and then got a cashier’s check to open the new account somewhere else, it might not be a big deal,” he said. “But people often open new accounts with cash money that they’ve saved up at home.”
When it comes to new credit, this can throw off your all-important debt to income ratio. Many lenders will re-run your credit report right before closing the loan and if new accounts appear, it could cause delays.
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8. Failing to shop around for a loan
It’s important to shop for lenders. According to Davis, first-time homebuyers tend not to shop around for a loan or negotiate hard enough for better financing terms.
“Loan officers are salespeople, and they are trying to quote you the highest interest rate and fees that they think you’ll pay,” he explained. “Talk to at least five lenders, compare rates and fees, and don’t forget to compare junk fees, not just points.”
On LendingTree, you can use the mortgage marketplace to potentially compare loan offers from multiple lenders in one place. It does not require a hard credit pull.
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9. Not being completely honest with your loan officer
Your loan officer is your representative throughout the loan qualification process and the sales transaction. Hubert often has clients who don’t divulge absolutely everything.
“If you lie about judgments, bankruptcies, foreclosures, short sales, student loans, or about default or unpaid IRS debt, it’s a problem,” he said.
Most lenders have software programs that can help spot prior judgments, bankruptcies, foreclosures or liens in a loan applicant’s past, which he’s seen lead to many loan denials.
“You can’t beat the system,” said Hubert. “You have to be honest with your loan officer in order for them to do the best job for you as a client.”
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10. Not sending the exact documents requested by your loan officer
You can make your loan officer’s job a lot harder, and put your chances of qualifying in jeopardy if you don’t send the exact documents that the loan officer requests.
“Many clients send in the documents that they think will work instead of sending the exact documents that we requested,” said Hubert. “Any time that happens, it just results in a delay and makes the process more complicated. You have to trust that your loan officer knows what they’re doing. If they ask for something, send them the exact documents they asked for, not your version of something.”
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11. Attempting to time the market
Some people approach real estate as they might approach investing in stocks — by attempting to anticipate the market. As a CFP, Ma often has clients that ask themselves, “Is this a good time for me to buy an apartment? Is this a good time to sell?”
Ma said that he prefers to tell clients that it’s better to make sure that it’s the right timing for your stage in life. Ma recommends asking yourself whether you plan to be in the home five to seven years from now, do you plan to settle down, or is there a chance that you could leave for some reason. How stable is your job, for example? Do you have thoughts of going to graduate school?
“These are all factors that might make sense in terms of your own personal timing because, from a market timing perspective, no one really knows. And if they did, they would be buying and selling homes for a living,” Ma added.
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The bottom line
The insights from loan experts reveal the mistakes that many home buyers make, and there are many more that we did not mention. The most important thing when it comes to buying real estate and your financial future is, to be honest with yourself. Find the best loan officer to represent your interests and remember that there will be hidden expenses even after you close on your home.
This article originally appeared on LendingTree.com and was syndicated by MediaFeed.org.
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