Even though property has appreciated rapidly over the last 5 years, it’s still a good time to consider real estate for investment. And if you are a first time homebuyer, you are probably very excited about the prospects of owning your own place instead of renting. Still, you need to be careful. There are at least five first-time homebuyer mistakes that have the potential to do long-term damage to your finances.
1. Buying more house than you can afford
Most people try to buy the biggest (read: the most expensive) house they can afford. They typically reason that their income will “grow” into the new home. Of course, they get a large helping of support in this thinking from their friendly neighborhood real estate agent.
But this is also the most fundamental mistake that first time home buyer can make!
The price you pay for a home sets in motion an entire series of expenses. It’s not just the monthly house payment – there are also utilities, insurance and repairs and maintenance to consider. All will increase commensurately with the price paid for the home. In addition, the price paid for a house can also affect future consumption patterns. The more expensive the home, the higher the price of the furniture and other appointments you are likely to put into it.
A better idea is to buy at least a little below your ability to pay. That will give you extra money to save and invest for your future, as well as a bit of a cushion in the event of a reduction in income.
2. Closing broke
Many people believe that closing broke is part of the “price” that you have to pay for buying a home, particularly the first time. However, being broke is a situation you should avoid at all costs, and you usually can.
When you buy a home it’s extremely important to understand that there will be other expenses subsequent to the purchase that you may not be able anticipate at the closing table. There may be unexpected repairs, necessary purchases, or even cash needed for non-housing purposes. If you close broke, you won’t be able to deal with any of those situations.
3. Buying a new car shortly after closing
This is actually a very common outcome. If you just bought a new home, you will think you need a new car to put in the driveway. But buying a home is a far more complicated purchase than nearly anything else you will buy. A house has to be maintained and repaired as needed, so it will be important for you to begin saving money immediately so that you are prepared for these situations.
If you begin putting money into major non-housing purchases, you may end up broke even if you had money after closing on the house. As a homeowner, you’ll always need to have extra money so you’re ready for contingent issues as they arise. Any extra money after closing should be directed into savings, not buying a new car.
In addition, the purchase of a new car usually involves taking on yet another debt. Since it is likely that your house payment increased when you moved into your new home, adding new car loan could push your budget over the edge.
If you recently bought a home, the purchase of a new car can and should wait until you have a chance to rebuild your finances. As a homeowner, you never want to have your finances stretched too thin.
4. Going on a spending spree to fill the house
When you buy a new home, it is natural to want to fill the house with contents that will make it special. This can include new furniture, window treatments, entertainment equipment, patio or deck furniture, or even new pots and pans for the kitchen.
But go slow with these purchases. Even though they are not nearly as expensive as a new car, when taken together the amount of money spent can be substantial. Once again, after the purchase of a home, your should work to solidify your finances. You want to get comfortable with the new house payment, as well as save money for unexpected emergencies. Until you reach that point, your old household contents will have to do a little longer.
5. Passing up (or ignoring) the home inspection
A home inspection is typically not required by a mortgage lender so many homebuyers, especially first-timers, avoid having it done. There are at least two reasons why they might pass it up:
- To save the cost (usually $200 to $500) of the home inspection, and
- To avoid learning of any bad news concerning the home that they have already fallen in love with.
Whether it is one of these two reasons, or something else, passing up a home inspection can be setting the stage for disaster. A home inspection will alert you to any significant structural damage to the home, as well as environmental issues with the property, and give you an opportunity to have them remedied before the closing. Even if they are not repaired, they can be used as a basis to renegotiate the sales price of the home, or to abandon the purchase altogether.
But if you pass on the home inspection, any and all problems with the house or the property will be solely your responsibility after closing.
No matter what you are feeling emotionally, have a home inspection done. And once you have it, read it thoroughly, and be fully prepared to act on the recommendations it provides. Doing so can save you thousands of dollars later.
Were there any mistakes that you made as a first time home buyer than you would want to warn other people about?