5 Crucial Mistakes for Home Buyers to Avoid

Buying a home should be fun, but can be a stressful experience for many individuals. In fact, surveys have indicated that it ranks among the top three most anxiety-inducing events in life, alongside death and taxes. This is understandable, given that purchasing a home often involves committing to hundreds of thousands of dollars in debt. For first-time buyers, the added pressure of not having much debt, outside of student loans, only heightens this sense of unease. 

While the primary source of stress comes from the unknown, preparing yourself ahead of time through education can alleviate the vast majority of stressful scenarios from the buying process, providing a much more enjoyable experience.


The first mistake that many home buyers tend to make is to use their gross income to budget their pre-approval. When speaking with lenders or real estate agents, they are likely to inquire about an individual's gross monthly income, pre-tax. They then proceed to halve that number, with FHA loans allowing for a 56% cut, and factor in other payments to determine how much an individual can afford each month. For instance, if someone earns $5,000 per month gross, the calculation would halve it to $2,500. If they have additional payments such as $500 for car loans and $100 for credit card bills, that number decreases further to $1,900 per month. This is a fairly significant payment for the average American and does not leave much room for retirement savings, emergency fund savings, or college accounts.


It is unfortunate to note that some realtors and loan officers pre-approve individuals for the maximum amount possible to secure their commission checks. They tend to tell home buyers how much home they can afford based on their income without explaining what that payment will actually entail once taxes and insurance are figured in. This often becomes apparent after a buyer has already viewed several homes and fallen in love with one. In reality, an individual's income is not the gross amount, but rather 20-35% less after taxes and insurance. This means that an individual earning $5,000 per month gross would have a net income of $3,200 to $4,000. Spending 50% or up to 76% of that on a house, car, and minimum credit card payments is not sustainable, leading to financial instability. This is commonly known as being house poor, where an individual overbuys on a home and is unable to save any additional money.

To avoid this scenario, it is crucial to engage in introspective thinking before speaking with a realtor or lender who may push for the maximum amount. Seeking advice from a trusted financial advisor, spouse, or parent can be helpful. One approach that works well for many is the 28% rule, which uses net income, not gross. The rule suggests dedicating roughly 28% of an individual's net income towards their monthly mortgage payments. For example, an individual earning $60k per year could afford a $1,400 monthly payment at 35% rather than $1,900 per month. Another way to approach budgeting is to consider what one is paying currently. If renting, how much is being spent each month, and is it comfortable? If the budget is increased, what other expenses will have to be sacrificed, such as dining out?



The second mistake that homebuyers commonly make in the real estate market pertains to putting aside enough money to cover the total costs of purchasing a home. Occasionally, lenders and realtors may fail to clearly communicate the actual costs involved in the home buying process, leading to confusion and delays in closing. Or worse, buyers who did not realize the true cost may be forced to pull funds from their retirement accounts or borrow from family members.

It is important for homebuyers to understand that there are multiple costs associated with buying a home, such as the down payment and closing costs including inspection and appraisal fees. Down payments typically range from 3% to 5% to 20%, or even 100% for those who purchase a home using cash. For example, for a home priced at $400,000, the typical down payment could be as low as $12,000 or as much as $80,000. VA loans offer the advantage of zero down payment, which can be a great option if you have a lender who is familiar with VA guidelines. Closing fees vary by state and typically range between 2% to 3% of the home's value. In addition to the costs associated with buying a home, it is recommended to have an emergency fund set aside. Experts advise having a one-month reserve fund to cover all expenses, with six months worth of accessible funds readily available within a 14 day period, such as selling stocks or cashing bonds.

Homebuyers should always consider whether the purchase of a home will impact their ability to save for the future or leave them financially insecure. It is not uncommon for unexpected events such as layoffs to occur, and buyers who have put everything into their new home may be forced to sell or dip into their retirement funds. After the sale, lenders and realtors will not be responsible for helping with mortgage payments and will only collect their fees. Therefore, it is crucial for homebuyers to carefully consider the full cost of purchasing a home and plan accordingly to avoid financial hardships.



The third common mistake that homebuyers often make is not establishing clear timelines for the home-buying process. Especially for first-time buyers, it can be tempting to treat the process like a quick trip to the store, but the reality is that buying a house takes substantial time and planning. This means to best avoid stress and ensure a smooth transaction, it is essential to establish a clear timeline from the start.


A helpful way to put this into perspective is to begin with the end in mind and work backward. For example, if a buyer's lease ends on June 1st and they plan to move, they will need to budget a few days for moving. To make any necessary repairs or changes before moving in, they will want to receive the keys from the seller 2 to 3 weeks prior to moving into the home, so May 10th or 15th at the latest. As most sellers need around 30 to 45 days to close on their new home, buyers should plan to be under contract with the seller by April 1st. Closing a loan typically takes between 20 and 30 days, depending on the type of loan and the lender. To account for finding the right home and possible inspection issues, buyers should be speaking with a lender and aim to begin their home search around January 15th, with a target closing date of March 1st. While it is possible to find the right home quickly, the average buyer takes 30 to 45 days to find the right one.

It is crucial to plan for potential hiccups in the process, such as credit score issues, which can delay or even derail the home-buying process. By establishing clear timelines and planning ahead, buyers can avoid stress and enjoy a smooth home-buying experience.



The fourth mistake that homebuyers commonly make is expecting to find the perfect house, which can be problematic for a few reasons. Even those who build their own homes often find that what they end up with is less than perfect, as there are always changes they wish they had made. While there are undoubtedly great homes out there, they usually come at a premium price. In most areas and price ranges, there are usually only one or two homes each week that are truly top tier, and these homes will always command a higher price than those that require a bit of work. However, if a buyer has some financial reserves set aside, they can opt for the tier two homes, which have great floor plans but may need a few updates like new carpet, fresh paint, or even a bathroom or kitchen remodel. These homes are typically sold at a much lower price and have much less competition, providing a wonderful opportunity to save money while also getting desirable updates. Ultimately, buyers will end up paying for updates in one way or another, so why not choose the updates they actually want



The final mistake frequently made by homebuyers is purchasing a home with equity in mind. According to statistics from the beginning of the pandemic until October 1st, 2021, the average home value increased by 45%. However, the current real estate market is different and not as lucrative as it was in the past few years. While there are predictions about what may happen next in the market, this is not the time to expect to make large profits from home equity. Instead, it's the time to buy a home that fits one's needs and hold onto it for an extended period, like the 7 years the average millennial stays in their home, 13 years for Generation X, or 18 years for Boomers. Rather than focusing on potential profits, homebuyers should buy a home for their long-term needs and enjoy it while updating it over time.


While owning a home can be one of life's most rewarding experiences, it's important to take a proactive approach by educating oneself about the potential pitfalls in the home buying process. By learning from others' mistakes, buyers can avoid costly errors and make informed decisions that align with their goals and financial situation. Investing time and effort into researching and understanding the real estate market can help buyers navigate the process with confidence and ease. Armed with the right knowledge and mindset, buyers can make a sound decision and enjoy many years of happy and satisfying home ownership.



Posted by Michael Perna on
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