Key takeaways

  1. The all-in costs of home ownership surprise most buyers. Understanding the costs beyond the monthly payment can help you prepare financially
  2. Buying a home is a very big emotional decision, and emotions lead many home buyers to make poor decisions that can be costly
  3. Focusing on the house alone and not the life you want and the home that can support it can lead to regret and buyer’s remorse
  4. When it comes to a mortgage, approval does not equal affordable. You need to know the monthly payment that’s right for all aspects of your finances
  5. Working with the wrong team of professionals can cost you a lot of money. The right team can make the process less stressful and save you money
  6. Lack of preparation trips up most first-time homebuyers. Proactive planning is the key to making your first home purchase a fulfilling experience

For many, buying a home is the largest financial decision they will ever make. For some, home ownership is an incredibly rewarding experience. For others, homeownership is fraught with stress, regret, and even financial challenges. With such a big decision on the line, it’s important to get it right. Here are five of the biggest homebuyer mistakes and what you can do to avoid them.

#1 - Underestimating the cost of home ownership

The mistake: Most homebuyers start their home search with a simple question, “How much house can I afford?” This question typically leads many to look at one figure, the mortgage payment. If the mortgage payment fits into the budget, a home is considered affordable. Making sure the mortgage payment fits into your budget and overall plan is important, but the problem is that this is where most people stop. They forget to consider all of the other costs that come with home ownership. They underestimate the “pluses” that lead to the real cost of owning a home:

Total cost of owning a home = closing costs + the down payment + monthly payments + HOA fees + utilities + furniture + maintenance + repairs + renovations + upgrades. 

The total cost of owning a home is much more than a monthly mortgage payment.

How to avoid the mistake: When buying a home, it’s important to look beyond the mortgage payment. The mortgage payment is a key factor in determining affordability (more on this below), but preparing and planning for all costs associated with buying a home is key. To properly prepare, make a list of all costs you could incur if you were to buy a home:

  • Closing costs: Typically between 3% to 5% of the purchase price but this can vary greatly depending on where you live.
  • Down payment: Putting 20% down is generally recommended, but it’s important to get advice on the right amount.
  • Moving costs: Depending on where you are moving, these costs can be anywhere from a few hundred dollars to several thousand.
  • New furniture: This will vary based on what furniture you have and the size of the new home, but be prepared for a bit of sticker shock that can run north of $10,000.
  •  Renovations or upgrades:  Variation here can be wide based on the home you are buying, its age, and your desire to make changes. This can be the second largest item so plan accordingly.
  • Ongoing maintenance: The recommendation is to put aside roughly 1% to 3% of the value of your home every year to cover maintenance costs.

Knowing all of your costs can help you navigate the process with greater confidence and avoid unpleasant surprises down the road.

#2 - Underestimating the emotional element

The mistake: Why do homebuyers underestimate the costs of homeownership and overestimate how far their money can stretch? Because while we think we are making the right decision, there is actually something much deeper driving our actions. When we make financial decisions, there are essentially two different brains fighting for control – a feeling brain driven by emotions and a thinking brain driven by logic and reason. Believe it or not, 90%+ of purchase decisions are based on emotions, which means more often than not we buy a home based on emotion rather than logic.

Buying a home is not only one of the biggest financial decisions most of us make, it’s also one of the biggest emotional decisions. We fall in love with a house and our emotions hijack the decision-making process so we stretch our budget, overlook the added costs (those pluses), or ignore the impact on the rest of our finances. 

How to avoid the mistake: Given the power that our emotions can exert over our actions and behaviors, it’s critical to be aware of our feelings and to understand how to process them to make smarter, more informed decisions. 

To do this, start by creating a list of what really matters in a home – indoor and outdoor space, number of bedrooms, a home office, layout preferences, size of the yard, and anything else that comes to mind for you.  Next, get crystal clear on what you can afford. Setting a budget before going house hunting is critical. And finally, take some time to reflect on how you feel about a home after you see it. The simple act of giving yourself space to think before acting can help ease anxiety, create a sense of calm, and help you make the right decision.

The point isn’t to entirely eliminate your emotions. Buying a home should be an exciting and enjoyable experience, but we need to be aware of our emotions so we don’t let them make the final decision.

#3 - Buying a house and not a home

The mistake: Nearly two thirds of millennials have regrets about buying a home and almost 60% of homeowners have felt some form of buyer’s remorse. Why? Because they focused on the house they wanted and failed to focus on the life they wanted or the impact a house has on their overall finances. Stemming from mistake #2 (how humans are inclined to make emotional decisions), many home buyers fall in love with an aspect of a home – the chef’s kitchen, the spa-like bathrooms, or the pool.

Unfortunately, this often leads them to overlook the things that may make the house less desirable – the long commute, a neighborhood without a sense of community, the endless yard work, the added costs (again, those pluses). 

How to avoid the mistake: There are a few steps you can take to make sure you buy the right house for the right reasons.

  • Step 1: Clearly define why you want to buy in the first place. Are you planting roots in a new town, investing in your future, tired of renting, or maybe even a little worried about missing out on a nice home in today’s real estate market?
  • Step 2: Define the life you want first instead of what you want in a house. The right home for you will support the life you want to live and the memories you want to create in it. How do you want to spend your time? Who are you spending it with? What about your commute? What type of neighborhood do you want? How important is walkability? What else matters to you?
  • Step 3: Be patient. Have patience when working through what you really want  and patience when searching for a home. This might be the hardest part, but it will pay off in the end.

The house itself isn’t the key to a happier life. It’s the life you build in and around it that matters.

#4 Thinking mortgage approval is the equivalent of affordable

The mistake: Mortgage lenders will approve homebuyers for a mortgage payment that can be as high as 43% of income before taxes and any deductions for workplace benefits. The 43% is really a total debt-to-income figure so if you have a car loan, student loans, or some other form of debt those monthly payments will reduce the amount you qualify for on the mortgage.

Let’s look at an example:

Let’s assume you make $10,000 per month before factoring in taxes and workplace benefits.

A mortgage loan officer may approve you for a monthly mortgage payment of up to $4,300 (43% of your before-tax income). If you had a $500 per month car payment, you may only get approved for $3,800 per month ($500 plus $3,800 comes to 43% of your $10,000 monthly salary).

Now let’s estimate that you pay 20% in taxes ($2,000) and that you are saving 15% to your 401(k) ($1,500). This means you are only taking home $6,500.</p?

This means that your mortgage payment would now be 66% of your take-home pay.

Mortgage loan officers, in many cases, will approve you for the maximum loan for which you qualify. They may not ask about the rest of your finances, your other savings and investing goals, or how your mortgage will affect the rest of your life.

How to avoid the mistake: Here are some simple guidelines to help keep your monthly mortgage payments in check. Housing related costs should not exceed 28% of your income before taxes. Total debt payments (which would include a mortgage, car loan, student loans, etc) should not exceed 36% of your income before taxes. These numbers aren’t set in stone, but they are good rules of thumb to follow. And, remember, when looking at the 28% going towards your home, don’t forget about the “pluses” which can add up quickly and put a dent in your cash flow.

Make sure you have a clear understanding of how your monthly payment will affect other areas of your finances. Just because you get approved  for a certain mortgage amount, it doesn't mean it’s truly affordable for you. 

#5 Not having the right team

The mistake:  While most homebuyers work with a real estate agent and a mortgage loan officer, it’s important to work with the right ones. Given the high costs associated with buying and selling a home, it’s critical to make a smart decision regarding the team that will guide you through it. Some agents and loan officers will simply help you find a home and get a mortgage. Their incentives are to sell a home and to find a way to make that home affordable. They aren’t incentivized to look at your life, your goals, or your entire financial picture to help you make the best decision. The wrong team could lead to some very costly mistakes.

How to avoid the mistake: When buying a home, you don’t want just any professionals on your team. You want to find the right team. For starters, you want to work with a REALTOR® due to their higher ethical standards. You also want to find a mortgage loan officer that will educate you on your options and help you find the right solution. If they don’t ask about your entire financial landscape, they likely aren’t a good fit. 

And finally, a CFP® professional can help you put all of the pieces together. They can help you understand what’s affordable, review your mortgage options to help you find the right one, look at how a home will impact the rest of your finances, and help you create a plan to save for your new home.

Having a team of trusted professionals can be the key to unlocking a successful home buying process.

Bonus: The one mistake first-time homebuyers make

#6 Failing to prepare for the entire process

The mistake: As a first-time homebuyer, the entire process from looking for a home to applying for a mortgage to understanding the financial aspects is new. Many first-time homebuyers rush into the process. They might look to buy a home before they pay off other debt. They might try to buy before they have saved appropriately for the down payment, closing costs, new furniture, and other important items. They may fail to account for how their home payment will affect their ability to save for short-term goals, invest in their 401(k) or IRA, or even prepare for a life event like getting married, starting a family, or a job change.

How to avoid the mistake: The answer might seem obvious, but the best way to avoid this mistake is to take the appropriate steps to prepare and proactively plan for your home purchase. Here are some simple steps to follow:

  1. Get your financial house in order: Make sure you have a plan to pay down or pay off any existing debt. You also want to create a plan to build a healthy credit score (better credit equals lower mortgage rates). Make sure you have a plan to save for the upfront costs of the new home as well. The costs can surprise you and you’ll want to be prepared.
  2. Look at all aspects of your financial life: Buying a home will affect everything from your available cash to your monthly cash flow and budget to your need for insurance and estate planning. It will even impact your taxes. Knowing, in advance, how home ownership will impact all areas of your finances is critical to making the right decision.
  3. Think about your future: Buying a home is a long-term commitment so it’s important to think about your life in the future and not just today. Are there any personal changes on the horizon – marriage, family, sending children to college? Are there any professional changes – promotion, job change, new career? Buying a home that can meet your needs today and tomorrow will help ensure you get the best value over time.

Buying your first home is a big step and one you want to enjoy and celebrate. Proactive planning can help you navigate the purchase with greater clarity and confidence.

Final word

Buying a home is supposed to be an exciting milestone. Unfortunately, for many, it ends up being a stressful process because it’s fraught with mistakes, big and small, that are easy to make. The good news is that if you are proactive in your planning and thoughtful in your approach, you can avoid the biggest mistakes most homebuyers make, find the home of your dreams, and start creating priceless memories.

To learn how a CFP® professional at Facet can help you create a financial strategy to prepare for your big purchase, avoid the biggest homebuying mistakes, and get you into the home of your dreams, get in touch today.