A house will probably be the most expensive item you will buy in your lifetime. Buying a home is a huge financial responsibility that you should be ready for, much like other heavy obligations in life. Hence, if you’re already planning to buy a house, here are the common money mistakes that you should avoid making:
1. Overextending your budget
Buying a home that you can’t afford is the biggest mistake you can make, even if you’re thinking of getting a reverse mortgage or selling the house off in the future. Not only does overextending your house budget leave little room for unexpected expenses, but it is also very risky. You never know if and when you will have financial troubles, and having a mortgage that is too expensive can have you sacrificing other financial obligations, possibly leading to debt.
2. Not checking credit score early on
Mortgage lenders consider your credit score as a representation of how likely you are to pay off your mortgage. If your credit score is within the good range, then you are more likely to get approved, as well as successfully negotiate lower interest terms. However, if your credit score is low, lenders will consider you as a risky borrower, and thus offer you higher interest rates.
Having a lower interest rate on your mortgage can save you thousands of dollars, not to mention lower your monthly mortgage payments. Thus, you should check your credit score before even getting a pre-approval from a lender. If it needs some work, you will have time to raise your credit score.
3. Spending everything you have
It is wise to save up around a 20 percent down payment on a house to keep monthly payments low and increase your chances of approval. However, if making a 20 percent down payment (or any other percentage) will drain your savings entirely, you are better off making a lower down payment or putting off home buying until you save more money.
Keep in mind that there are unexpected expenses that can pop up during the home buying process, especially repairs and maintenance costs. If you spend all your money on the down payment, you will be forced to go into debt to pay for expenses after buying the house, as well as other related costs that might arise.
4. Not having an emergency fund
Before buying a house, it is recommended to have at least three to six months of living expenses saved up in your bank account. This will serve as your emergency fund in case you lose your job or have to make an unexpected but necessary expense. If you don’t have an emergency fund, you put yourself, your family, and your finances at risk in case something happens.
5. Failing to prepare for homeownership costs
When you become a homeowner, there are other costs that you have to consider on top of the mortgage payment. You’re going to have to spend on utilities, repairs, maintenance, furnishing, and many other things after you move into your new home. Not having a budget for these homeownership costs can affect the quality of your house, and even underestimating the costs can leave you struggling after you sign the mortgage contract.
6. Handling credit carelessly
Mortgage lenders recheck your credit reports before closing to see if there are any changes in your finances. If you make any large purchases on credit, open new credit cards, take out new loans, or close your accounts, you might jeopardize your application and have to do it all over again with a different lender. Wait until after closing to do anything drastic with your finances, especially your credit.
7. Not shopping around
If you are a first-time homebuyer, you might have little experience dealing with mortgage lenders and the like. Hence, talking with more than one lender is a must if you want to find a loan that works best for you and your finances. Otherwise, you might not be able to compare different options and end up with a mortgage that is not the best for your budget.
You might make a lot of mistakes when buying a home for the first time, and you might not be able to avoid all of them. However, avoiding money mistakes should be your top priority. If you become careless with your finances when applying for a mortgage and looking for the perfect house, you might compromise your financial well-being after you sign on the dotted line.