Young couple looking at their dream house

5 Home Buying Mistakes That Will Make You House Poor

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

During my 18-year career as a real estate broker, I learned a lot of things but none 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.

 

Young couple looking at their dream house

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 is going to tell you how much house you can afford and how much money the company is willing to lend to you. Understand this: He or she is concerned about only two things: 1) Your ability to repay the mortgage and 2) the size of his commission.

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

You need to set your own housing budget before you ever sit down with a lender or other real estate professional, which is 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 are depending 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—things like property taxes, property insurance, maintenance, and repairs.

Renters don’t worry about replacing the roof, appliances, or the HVAC (heating, ventilation, and air-conditioning). You need to factor in all of 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-years fixed is the wisest choice, but don’t be so quick to believe that.

Make sure you consider a 15-year fixed-rate mortgage instead. 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 ever will become your best investment as well—one that will come back to bless you in so many ways!


Read this next:

Top 10 Student Loans Tips for Recent Graduates—and Not So Recent, Too!

The Ugly Truth About No-Interest, No-Payments Offers

The First Rule of Borrowing Money: Don’t Be Stupid

 

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12 replies
  1. Sue
    Sue says:

    I am trying to figure out where the best place to retire is between Ohio, Kentucky, or Indiana.
    I really don’t want my pension taxed and I heard some placed are better than others.

    Reply
  2. Cally Ross
    Cally Ross says:

    My advice is to never buy a home planning on “fixing it up”, or at least really think through those things you want to change. (unless you’re doing it for an investment to turn around and sell.) There’s never enough time and/or money to make those changes!
    i’ve lived 16 years with carpet i can’t stand because we could replace it “one day”. raising 4 kids, and the associated costs, meant we’ve never had the money to replace it.

    Reply
  3. Ed
    Ed says:

    Mostly good advice in the article. The best advice I can add is to live below your means and buy a cheaper house than you can afford. Realtors and lenders are looking to make as big a sale as possible. Not all are unscrupulous but you have to make sure you don’t let them talk you into more than you can safely afford. Don’t plan based on future gains, plan for future hardships and shop accordingly. I bought my home when lenders would allow no down payment and were pushing adjustable rate mortgages. I wanted to avoid PMI so I opted for a 30 yr fixed rate loan and put exactly 20% down. That left me with very little margin for error financially for a couple of months but the gamble paid off. I bought much less than I could afford which let me quickly rebuild my emergency fund and begin paying the mortgage down. I absolutely agree with the other commenters that a 30 yr fixed rate mortgage is the way to go. That way your MINIMUM monthly payment is low and will stay that way if the economy changes. The bank doesn’t care how much extra you’ve paid if you miss a payment. It was a good thing I got 30 year fixed rate b/c the recession hit 2 years after I purchased my house and I found my self out of work for an extended time. My mortgage payment was less than the local avg rent. That’s the only way I held my financial life together. When times got better, I started paying extra again and still managed to pay the mortgage off in just 14 years. Now that mortgage amount and the extra I was paying goes into my savings. It’s a good feeling.

    Reply
  4. Suzanne
    Suzanne says:

    My husband and I recently went house-hunting in the area where we’ve lived for the last 35 years. We found a beautiful home that was perfect for us with a price we could afford. Unfortunately it came with a HOA and accompanying hefty monthly bill. And in addition there were restrictions on how we could use our own property. We didn’t buy that home. The house we’re in now is too small, but we owe only about 1/3 of what it’s worth and we’re paying that down rapidly. And it occurs to us that we could expand this house for about the same monthly cost of the HOA in the home we considered buying.

    Reply
  5. Karen
    Karen says:

    Regarding the 15-year mortgage, my husband and I decided to go with a 30-year mortgage and make extra “principal-only” payments each month. This has given us the security of knowing we can afford the regular payment every month, even if there is some kind of financial hurdle that prevents us from making the extra “principal-only” payment on any given month. We are currently on track to have our 30-year mortgage paid off in only 10 years. YAY!

    Reply
  6. Cathy down on the farm ...
    Cathy down on the farm ... says:

    I have heard that 1,000 people are entering Florida daily. To move to Florida, it seems, is the American dream. When we moved there 16 years ago we found out it can be somewhat of a nightmare. Any and all cars you bring into Florida you paid $100.00 each – this was 16 years ago, mind you. With numerous cars and kids, this was expensive. When buying a home, watch out for Home Owner Association Fees. This can be critical. In the Tampa Bay area they can be anywhere from $50.00 a month – condos, and this is rare – to $450.00 plus a month – yes, for a condo! This means you will never be fully debt free … this bill will always hang over your head for the duration that you own the condo. Watch your elevation to sea level. Everything to the East of Highway 19 in Tampa Bay didn’t usually flood but you never knew, and it might. Everything to the West was almost a sure thing to flood, when tropical storms/hurricanes and monsoon rains came through. We were to the East but still had flood insurance. This is a SEPARATE policy. They don’t tell you that. Last time we paid the premium it was $450.00/yearly- a year and a half ago. Make sure you know what your water and sewage bills are before you sign on the dotted line. HOA’s can be very strict and you must water your grass and maintain your home nicely or you will get fined. Many people have complained that their water bills are killing them, in the Florida heat. There are many more little “gotchas” in Florida that are too numerous to mention when home or condo buying there. These nickles and dimes add up. Watch out for Florida because “living in paradise” can turn into a living “he!!” We hope to go back for the winters, within the year to “look” at condos but we will be very vigilant in our search and will most likely rent for the short term. Living in rural Indiana is literally almost half the cost of living in Florida/Tampa Bay, from insurance to groceries. I’ve been told that over the last five years or so, many are coming in from Jersey and New York to retire and these folks have jacked up the prices with their bidding wars. A scary “bubble” we are looking at here…

    Reply
  7. Kay Jones
    Kay Jones says:

    Location, location location! Yes, areas can change and school quality can change, but basically where the house is becomes the biggest factor you can’t change. Research area maps. Are you in a flood plane? Drive around and see how the roads are maintained. Look at how the neighbors keep up their property. Check it out daytime and at night. Does the area change character after dark. Does the main road become a drag strip? Research how the schools score. Yes, you can send your child to a private school or home school, but the school score can determine if people will even look at the property…..important if you are the seller, not the buyer. Take your time to look into the little things.

    Reply
  8. Karen
    Karen says:

    I know there are many schools of thought on this, but my husband and I have always put the least amount of down payment on a house at the advice of our financial manager. Real estate is no longer the investment it used to be and so many folks are losing their homes to foreclosure, walking away from an upside down mortgage or having no luck in selling their homes. Having to be forced to say good-bye to a teeny, tiny down payment is far less painful than walking away from a larger one.

    Reply
  9. Michelle Pape
    Michelle Pape says:

    I am a big fan and often share your advice with my coworkers and customers. I am a mortgage lender at a community bank, and have to say that not all lenders will try to guide their customers into the biggest mortgage possible. We care about what is truly best for our customers (and of course what they can comfortably pay back)! I know there are some predatory lenders out there, but most community banks are not that way.
    Keep the great advice coming!

    Reply
  10. Maria
    Maria says:

    Very interesting article, Mary but I beg to differ on going with the 15 year loan no matter what. If you opt for a 30 year loan you have the flexibility of making periodic pre-payments and thus lowering the amount of years on your loan. That is what we did (and we paid it off in 7 years, saving a lot of interest). However, if you choose the 15 year option, and times get rough, you’re stuck with a higher monthly payment and you don’t have the same flexibility as the longer option. In other words, you can shorten the amount of years as you choose with the 30 year option (paying a smaller payment each month) but it’s not feasible to do that with the 15 year option which you lock in from day one. Make sense?

    Reply
  11. Gena Moore
    Gena Moore says:

    I purchased a house for 75,000 that now only appraised for 45,000.
    I thought real estate was a safe investment but I have purchased 3 houses in my lifetime and each time could not get my money back when selling. How can you know that a location will not appreciate in value?

    Reply

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