Filed under: Mortgages, Real Estate, Housing Market, Home Buying, Credit History
By Maryalene LaPonsie
Whether you're part of the 1 percent or the 99 percent, a house is likely the biggest single purchase you'll ever make.
Unfortunately, plenty of people make dumb mistakes when buying a house, mistakes that could cost tens of thousands of dollars in extra interest or, worse, saddle them with a home they can't afford and can't unload.
Here are seven dumb moves homebuyers make year after year.
Dumb Move No. 1: Ignoring your credit score
Your credit score can make or break your interest rate. You see, lenders save their best interest rates for those with the best credit scores. They know people with great scores will almost certainly pay off their loan in full.
Meanwhile, if your credit score is hovering somewhere in the 600s or below, lenders get nervous that you're going to bail or go bankrupt on them. Sure, they might still give you a loan, but they're going to jack up the interest rate so they can get as much interest as possible before your finances potentially go belly up.
At today's interest rates, FICO estimates a person with a credit score of 639 will pay $138 more a month for a $150,000 mortgage than an individual with the same mortgage and a credit score of 780. That translates to someone's crappy credit costing them nearly $50,000 more over the life of a 30-year, fixed-rate loan.
Don't make the mistake of ignoring your credit score before house shopping. If your number is stuck in the basement, use our tips to raise your score as quickly as possible.
Dumb Move No. 2: Not getting pre-approved for a loan
This isn't the same as being prequalified, although some people use the terms interchangeably.
Being pre-approved by a lender gives you a realistic number to use while house shopping. It can also give you an edge if multiple people are placing offers on the same property.
However, be realistic about what you can actually afford versus what the bank says you can afford. Borrowing up to the bank approved limit may stretch your finances and set you up for a major catastrophe in the event of a job loss or injury. My advice is to shave at least 10 percent off the bank-approved amount and use that as your maximum price while house hunting.
Dumb Move No. 3: Falling for an expensive loan
When you're talking to a lender, don't fall into the trap of signing on to a risky loan. Banks and brokers can sometimes use adjustable-rate or interest-only loans to persuade people to buy more house than they can afford.
These loans start out with low payments, usually for the first five years, and then the interest rate adjusts and takes your payment skyward. Some mortgage reps will try to convince you this is no big deal. They will say you can just refinance in five years or perhaps sell the home.
Well, that didn't work out so well for all the people who signed on for subprime mortgages before the Great Recession and then saw their home values disintegrate. Those people couldn't refinance their underwater loans or sell their home, and many ended up staring at foreclosure notices.
Resist the sales talk and keep your feet on the ground when looking at houses. A fixed-rate mortgage gives you security and peace of mind, which may not be as glamorous as the giant house of your dream, but it sure is smart.
Dumb Move No. 4: Going with an inferior (or no) agent
We live in a DIY age, but for most people, it's a mistake to go it alone through the home-buying process.
A good agent can direct you to hot properties entering the market, connect you to competent lenders and inspectors and generally smooth out any bumps that may arise. This isn't the time to be nice and use your brother's friend's uncle as a favor. You're making a major purchase, and you want a proven professional to walk with you through the process.
And if you really can't bear to pay a commission to an agent, at least get a real estate lawyer to help draw up your offer and look over paperwork before you sign on the dotted line.
Dumb Move No. 5: Buying based on emotion rather than reality
People see a house they love, and the planned budget goes out the window. Or, even if the house remains within their budgeted price, they don't think about all the extras that may come along with it. A pool needs to be maintained; a huge lawn must be mowed; and a homeowners association will not only demand annual fees, but also your undying loyalty to their bylaws.
Before buying a house, ask yourself these questions to make sure your purchase is a rational decision:
- Can I comfortably afford this house?
- Can I comfortably afford the taxes on this house?
- Can I comfortably afford to maintain, heat and cool this house?
- Can I pay for renovations if needed? Will my desired additions and improvements be allowed by the HOA or local zoning ordinance?
- How long do I envision living in this house?
- Is there anything outside my control that could negatively impact the resale value of this house?
- Do the rooms and layout make sense for our family?
- A [hot tub, outdoor kitchen, fill-in-the-blank] is a great feature, but realistically, will my family use it?
Part of the problem with buying on emotion is that it can lead you to make other dumb mistakes, like skipping a home inspection.
Regardless of whether you're buying new construction or a historic home, you need to have it inspected before finalizing the sale. Don't trust your own judgment. A professional will be able to point out possible code violations, safety threats and structural damage. To make the most of the inspection, try to walk through the house with the inspector so they can point out potential problems and you can ask questions.
An inspection can lengthen the home-buying process, but it's worth any inconvenience. The alternative may be finding out your house has a costly or dangerous problem after you move in.
Dumb Move No. 7: Forgetting to have a back-up plan
The last dumb move homebuyers make is not having a Plan B.
For example, what happens if the home inspection shows the beams in the basement are rotting? Do you pull out of the contract and lose your earnest money?
Hopefully, you've avoided mistake No. 4 and have a decent buying agent. That person should have entered a clause into your offer that ensures you get back your deposit in the event the inspection doesn't go well.
You'll also need to have a back-up plan for what happens if the house doesn't appraise as expected or if you were counting on funding through a particular loan program that doesn't materialize.
Does anyone want to fess up to making one of these mistakes? I'll admit to using the friend of a relative for our first home purchase. It wasn't a disastrous mistake, but I think we could have done better with someone more experienced.
How about you? Feel free to share in the comments below or on our Facebook page.
