When it comes to buying a home, there are smart ways to go about it and less smart ways. Follow some of the wrong paths and you can end up spending a lot more than you need to or ending up with a home that isn't what you wanted, needed, or could afford. Here are seven homebuyer mistakes to avoid making.
1. Not knowing how much you can afford to pay.
Once you start shopping around for a new home, you'll probably end up seeing some that are out of your price range, whether you realize that or not. It's a big mistake to let yourself buy a home that will be expensive enough to have you stretched thin financially.
Some experts have advised spending no more than 25% to 30% of your gross monthly income on housing (including property taxes and insurance), but you're not necessarily well served by that broad guideline, as a lot may depend on real estate costs where you live, how many children you have, and so on. Instead, take the time to figure out just what you can afford. Total your household expenses, such as food, utilities, transportation, insurance, travel, entertainment, auto maintenance, debt payments, contributions to savings accounts, and so on -- but not your rent. Subtract that total from your household income, and you'll get a rough idea of what you might be able to spend on housing. Don't aim to spend all of that, though, as you should account for emergencies that pop up (such as a job loss or costly health issue) or other needs.
Remember that there will be many more costs once you buy your new home, such as repairs, renovations, furnishings, and perhaps a new refrigerator or a membership fee at a local club. If you're selling a home to buy this new one, you might need to spend there, too, to get it looking its best.
A good credit score means a lower mortgage interest rate. Photo: me and the sysop, Flickr.
2. Not checking your credit report and score
Another classic homebuyer mistake is ignoring your credit score -- which lenders use to determine what interest rate they offer you. About 90% of lenders will check your FICO credit score, and the folks at MyFICO.com have a handy interactive table showing you what a difference your credit score makes in the interest rates you're offered. When I checked it, for example, it showed that if you were borrowing $200,000 on a 30-year fixed-rate mortgage, and you had a top FICO score, in the 760 to 850 range, you might get an interest rate of 3.74%, with a monthly payment of $925 and total interest paid over the 30 years of $133,076. If your score was 650, though, your rate would be more like 4.78%, with a monthly payment of $1,047 and total interest of $177,063. That's $122 more per month ($1,464 per year) and a whopping $44,000 more in interest.
It's smart to know your score, because if it's quite poor, you might choose to put off homebuying for a while, to improve your score -- by paying down some debt, paying bills on time consistently, and so on.
3. Not shopping around for a mortgage
If the first lender you consult offers a seemingly great interest rate, don't stop there. Be sure to get a handful of quotes, from a variety of sources, such as local and national banks, credit unions, and perhaps a mortgage broker or two. Read up on mortgages first and get a handle on their terminology. Being a savvy shopper might get you better rates, as lenders will know that you've done your homework. READ MORE