It’s now officially summer, and you know what that means, right? You guessed it: it’s home buying season. It’s also wedding season, baseball season, street festival season, and the season for all the great things that happen when the weather isn’t meant for polar bears.
During this home buying season, make sure your dream of homeownership doesn’t turn into a nightmare by avoiding these three very common home buying pitfalls.
Buying more home than you can afford
But if you get approved for a loan of a certain size you must be able to afford it, right? Not so quick my friend. See, when you get approved for a loan amount, you’re typically approved based on your Debt-to-Income ratio: your monthly debts divided by your gross monthly income. The problem with this calculation is that monthly debt does not paint a full picture of your lifestyle. It doesn’t include your weekend trips to Vegas, your yearly vacation to the French Riviera, your daily $5+ Starbucks latte, your $400 leather shoes, etc.
The list goes on and on, but you get the point. People’s lifestyles are very different, and credit reports used by mortgage companies don’t necessarily capture that (unless you’re paying for your lavish lifestyle with credit cards, in which case you may not qualify for a loan at all). It’s up to you to be responsible and honest with yourself about how much home you can afford and not just let mortgage guidelines determine that for you.
Rushing yourself through the home shopping process
Finding the right home takes time. Don’t rush it. Don’t let your excitement take a hold of you to the point where you end up making a rash decision. Shopping for a home is a lot of fun, but it’s also serious business. The following are just a few recommendations:
Write down a list of certain home features your new home must absolutely have or it’s a deal breaker (e.g. two bathrooms, an open kitchen, etc.). This will keep you focused and keep you from falling in love with a home that doesn’t really meet your needs.
When you find a home you like, make sure to visit it several times on several days of the week and at different times during the day. A home can look and feel very different on a calm and sunny Sunday afternoon than on a hectic and rainy Monday night.
If at all possible, get a home inspection (sometimes an inspection is required anyway). Avoid surprises and know exactly what you’re getting into. An inspection can also help you negotiate more effectively.
Keep a home buying journal. Write an entry every time you visit a home. What did you like? What didn’t you like? This will help you narrow down your list of finalists.
Not getting the right home loan for your needs
This is a big one. Getting a mortgage that fits your needs can save you a lot of money and headache in the long run. Let me walk you through a quick example that illustrates this point very clearly.
Let’s say Luigi is buying his first home, and he expects to stay in that home for no longer than five years. In fact, he’s absolutely, 110%, super duper extra sure that he’ll sell the home the day before his fifth year anniversary of buying it. If this is the case, then a 5-year adjustable rate mortgage (ARM) is the perfect loan for Luigi. He will never be exposed to the potential interest rate fluctuation of the loan, and he will enjoy its lower interest rate and lower monthly payment for five years.
But no one is 100% certain about anything, so how can Luigi be so sure he’ll only stay in his home five years minus one day? Well, Luigi is a fictional superhero, and you’re right: us common folk don’t have those amazing powers. This is why an adjustable rate mortgage is not for everyone. There is an inherent risk with this product: if you stay longer than you expected, you may be exposed to interest rate fluctuations.
On the MortgageHippo Blog, we’ve worked hard to provide home buyers, especially first-time home buyers, with tools and information to help avoid the common pitfalls outlined in this post. Happy house-hunting!
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