If you have a high credit score, enough money for a 20% down payment, and you're debt-free or carrying a small debt load, lenders might qualify you for a larger mortgage. Use a mortgage calculator to estimate how much your monthly payments could cost.
But what about the many factors that lenders overlook? They don't ask questions like:
- How secure is your job or industry? Is there a chance that your company might downsize or close?
- If you're married or partnered, will you both remain employed full-time? Or is there a chance one person might become a stay-at-home parent or caretaker for an elderly relative?
- Do you plan on returning back to school, changing careers, or starting a business, which might result in several years of your income dropping?
- Do you have medical expenses or legal bills that consume a large portion of your income?
- Do you want to expand your family and need to plan for child care expenses?
There's more complexity to your financial picture than simply the ratio of your debt obligations to your income. Further, your income will fluctuate over the next three decades. Build in some flexibility for these changes by considering a less expensive home than you qualify for.
2. Not shopping around for a mortgage
It's tempting to head to the nearest bank and apply for a loan, but shopping around offers more benefits than simply getting you a better interest rate.
Some lenders are better at working with borrowers who have specific situations, like self-employed or newly divorced borrowers. Some lenders have more experience working with specific types of loans, like Department of Veteran's Affairs (VA) secured loans. In addition, some banks aren't approved to offer FHA-backed loans, which means you'd be locked out of this choice if you only look to one lender. Make sure you understand the different types of mortgages available to you.
3. Signing an exclusive buyer's agent agreement without understanding the terms
Your real estate agent will most likely ask you to sign an exclusivity agreement. This is standard practice, and it protects the agent from the risk of working for free.
Many home buyers mistakenly assume this agreement states the agent will receive a commission if the buyer purchases a home that the agent showed them. In reality, though, many of these agreements state the agent will receive a commission if the buyer purchases any home within a specified time span, regardless of whether or not the agent was involved in the deal.
This could also come back to haunt you if you and your agent simply don't work well together. Perhaps you're disappointed with the agent's responsiveness or knowledge, but the terms of your contract bind you to working together for three months. In this case, you might have to pass on an otherwise-ideal home. However, your agreement will include a termination clause, outlining the conditions and process for breaking the contract; an agent's poor performance is often acceptable grounds for termination. While you may need to document this poor performance in order to justify the contact's termination, don't be afraid to do so.
To prevent any problems, make sure you understand the terms of the agreement before you sign it. One simple approach is to ask the agent if the time span outlined in the agreement could be just a few weeks, rather than several months.
4. Waiving the inspection contingency
If you're competing in a hot market, in which sellers are receiving multiple offers, you might be tempted to waive the inspection contingency (if you aren't working with a lender that requires an inspection). You hope this will make your offer more competitive and boost the likelihood that the seller will choose yours.
Instead, if you want to make your offer more competitive, you could reduce your inspection contingency to three to five days (rather than the common 10 days) but beware: inspectors are often busy and might not be able to come to your property at short notice. Make sure you confirm availability with a professional, licensed inspector ahead of time.
Another option is to agree to purchase the home in "as-is" condition, which sets the expectation that the seller won't make any repairs or improvements. However, you can also ask for a 10-day buyer's general right to terminate, which allows you to terminate your contract and receive your earnest deposit money5 back for any reason during this window of time. You can then send an inspector to look at the property during this time.
5. Not having enough savings
Many buyers use their savings for the down payment and closing costs, which means they have nothing left over to make minor repairs, cover maintenance costs, or handle an emergency like a leaking roof.
You may need to buy a less expensive home or delay home buying until you've saved a three-to-six month buffer. You could also buy a home with less than a 20% down payment, even if you could technically reach the 20% threshold by dumping every penny out of your accounts. It's better to keep cash reserves on hand, even if you have to pay private mortgage insurance for a short period.
6. Not considering transportation costs
If you're shopping outside the city for a cheaper home, that's great, but what transportation costs will you face? Buying a home that's an hour away from work will affect your commuting costs when you're comparing prices.
The cost of your commute is more than just gasoline; you'll ultimately pay more for vehicle wear-and-tear and depreciation on your vehicle. In other words, the more you drive your car, the more money you'll spend maintaining and repairing it — and the less money you'll get when you resell your car (more miles on the odometer means lower sales price, all other things being equal).
A good place to start with estimating your commuting costs is to use the IRS standard mileage rate6 for businesses. For 2019, this rate is 58 cents per mile, though your actual expenses may vary depending on whether you drive a gas guzzler or a fuel-efficient vehicle.
These aren't the only costs to consider. A lengthy commute could force you to pay for extra child care hours or purchase more convenience foods due to a tighter schedule.
You'll also pay the hard-to-quantify cost of missed opportunity, because the time you spend commuting is time that you're not spending with your family or other things of value outside your vehicle.
What else should I know?
This is a snapshot of common home buying mistakes to avoid. To learn more about the home buying process, download our free ebook below.
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