3 Financial Mistakes People Often Make Before Buying a Home
Written by: Danielle Kozich
3 Financial Mistakes People Often Make Before Buying a Home
You’ll likely never make a bigger purchase in your life than buying a home. This will affect your finances for the next few decades, so it’s vital that you are wise throughout the home-buying process. If you are not careful, you could get into trouble with your budget and not be able to afford your payments. Or, you might be “house poor,” devoting too much of your income to paying for your home. Avoiding common missteps when purchasing a home will keep your finances on track and give you peace of mind.
1. Buying More House Than You Can Afford
It’s not uncommon for people to think with their eyes and heart instead of their brain when it comes to buying a house. Seeing a gorgeous home with all the features you want can be appealing. But if the price tag doesn’t fit within your budget, it’s best to pass it by and search for something with a lower cost. Bear in mind that just because you can qualify for a certain amount doesn’t mean you can afford it.
A lender may pre approve you for a certain amount based on your credit score and debt-to-income ratio. However, you need to consider other home ownership costs and other obligations in the equation. Homeowner’s insurance, home repairs, and utilities can quickly add up. Plus, you have a wide array of other monthly costs that only you can best evaluate. These include your food budget, activities for kids, and medical bills. Always include these budget items as you decide how much you can afford.
2. Not Saving for a Down Payment
It is possible to find home loans that require small down payments or no down payment at all. This may sound appealing so you can keep more of your hard-earned cash. But recognize that the less you put down, the more your purchase price will be, and the more you will pay in the long run for your house. A larger down payment will lower your monthly mortgage payment and might even get you a better interest rate.
As soon as you know you want to look for a home, start saving. If you have a healthy savings account, don’t tap into it before putting money down on your home. Ideally, a 25 percent down payment is the goal you should aim for.
3. Having too Much Debt
The amount of debt you carry will play a significant role in how much home you can qualify for. If you have an uncomfortable amount of debt, do what you can to pay as much off as possible before buying a home. Lenders want to see that you have few obligations and can afford to make your monthly mortgage payments. In the weeks and months leading up to buying a home, don’t apply for more credit cards or other installments, if possible.
If you can stay away from these common errors, you are more likely to afford your home and have some extra funds. Follow these guidelines so you can be in good financial shape. You can then be ready to look for the most popular moving companies and take care of the other facets of the moving process.