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5 Home Buying Mistakes That Will Make You House Poor

/Updated /5 Comments/in /by Mary Hunt

Buying a home is likely the largest purchase you will ever make. This is not the time to make mistakes that could quickly plunge you into a financial situation you cannot afford. 

A man that is standing in the grass

During my 18-year career as a real estate broker, I learned a lot of things, but none were as valuable as what not to do. I didn’t learn this in a seminar or while studying to pass the licensing exam. I witnessed real-life situations where buyers did really dumb things related to buying real estate—buyers who then went on to regret the decisions they’d made.

Avoid these five home-buying mistakes, and you will avoid getting in over your heads with a house you cannot afford—and save yourself many thousands of dollars and heartaches in the process.

Mistake: Allowing a lender to determine how much you can afford

When you meet with a lender to get pre-approved for a mortgage, that lender will tell you how much house you can afford and how much money the company is willing to lend you. Understand this: He or she is concerned about only two things: 1) The amount of his commission and 2) your ability to get approved for the mortgage loan

This lender wants to steer you into the biggest mortgage possible. Ignore that number. The lender’s number is not based on what you can afford because the lender has no idea what you can afford!

You must set your own housing budget before you ever sit down with a lender or other real estate professional based on your specific financial situation and lifestyle. And that housing budget should be realistic enough so that you can afford to make progress on all your other important financial goals like maintaining a healthy emergency fund, getting debt-free, and funding retirement accounts.

Mistake: Basing your housing budget on tax breaks

If you itemize your tax return, the interest you pay on your mortgage may be tax-deductible. That can be a valuable tax break, but it shouldn’t have a bearing on the size of the housing budget you give yourself.

If things are so thin you will depend on that tax break to qualify for a mortgage, you are skating on thin ice. That would be a clear sign you are getting in too deep into a house deal you cannot afford.

Make sure your mortgage will be affordable without considering the mortgage interest deduction.

Mistake: Making the smallest down payment possible

Your down payment represents your “skin in the game.” It is the amount of that house you will own on the day you close the deal. Twenty-percent (20%) down payment is the minimum you should consider. If you cannot come up with that amount, you need to keep saving until you have that amount in cash.

Starting out with 20% equity will go a long way to protect you against the heartbreak of discovering yourself upside-down in a mortgage you cannot afford. 

Mistake: Ignoring related costs

 It is easy for first-time buyers to assume that $1,500 monthly rent is the same as $1,500 monthly mortgage payments. Homeowners have related expenses that renters do not—property taxes, insurance, maintenance, and repairs.

Renters don’t worry about replacing the roof, appliances, or HVAC (heating, ventilation, and air-conditioning). You must factor in all these things when setting your home-buying budget. 

Mistake: Assuming a 30-year fixed-rate mortgage is best

For sure, you want a mortgage with fixed-rate interest, but you might not want one for 30 years. The lender might try to assure you 30-year fixed is the wisest choice, but don’t be so quick to believe that.

Make sure you consider a 15-year fixed-rate mortgage. You’ll avoid paying many thousands in interest and have a much better shot at paying it off in full before retirement if you set this up on a 15-year repayment plan. You may be surprised to discover that the monthly payment on a 15-year fixed-rate mortgage is not that much greater than the 30-year option. 

If you avoid these mistakes and buy a home you can truly afford, your largest purchase will become your best investment—one that will come back to bless you in so many ways!

 

Current Facts—Forbes on Aug 25, 2022

  1. Pending home sales fell 1% from June to July, which was significantly less than the 4% predicted.
  2. Housing prices have remained strong, but activity levels have fallen consistently for the past nine months, due to rising interest rates and lower inventory levels.
  3. The average mortgage interest rate has fallen from 5.78% in mid-June to 5.30% in July.
  4. Getting on the property ladder is likely to continue to be challenging.

 

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5 replies
  2. Realtor in Edmonton says:

    If you’re getting a mortgage, one of the worst mistakes you can make is not putting down a large enough down payment.

    Reply
  3. Jeanne says:

    I bought my house in 1994. I figured out how much I could afford as a monthly payment. I determined that $73,000 was the limit I was comfortable with borrowing. Then I started “paying myself” the difference between the existing rent ($250/month) and the top mortgage payment I thought I could swing ($700/month). I did that for over 3 years to make sure I could “afford” the payment without touching it. If not, there would be no house! It was not always easy but I made it work and bought the house. I paid it off over 10 years ago. The house is now valued at $180,000!

    Reply
    • Jeanne says:

      Wanted to add that when I got my house payment number, it was less than the $700 I had planned for…I went ahead and paid $700/month which helped me pay off the loan earlier!

      Reply
  4. Pat C says:

    Also, when considering your mortgage, look at ways to pay down the principal. For example, if you pay bi-weekly, you’ll in effect make an extra month’s payment each year, relatively painlessly. Alternately some lenders allow you to make an extra payment or two per year, often on the anniversary. Again, that reduces your principal. I had my mortgage through a Credit Union, and they allowed me to make payments up to 10% of the original principal. I was never able to do that, but I was able over the years to make sufficient payments to knock 5 years off my mortgage. If you can make your mortgage payments and interest rates fall, renew your mortgage so that you’re monthly payment stays the same. Again, anything you can do to reduce the principal is a win for you.

    Reply

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