Buying a home is a significant decision. While it can be an exciting process, it is important not to let that excitement cause you to make a crucial mistake. Take the time to avoid the following errors and save yourself the hassle of buying a home that you cannot afford.
Forgetting About the Added Cost of Owning a Home
One of the most common mistakes is forgetting about the various added costs that come with buying a home. This mistake is especially common for first time home buyers. If you have never owned a home before, you may not think about the cost of property taxes, utilities, lawn care, and maintenance.
You also have a variety of appliances that renters do not need to deal with. Water heaters and boilers have a limited service life. When these appliances break down, or the roof starts to leak, it is your responsibility to deal with the repairs or replacement.
These are costs that you may not need to worry about when you rent. However, they may make a difference when determining how much you can afford.
Borrowing More Than You Can Afford for Repayments
It is easy to end up borrowing more than you can afford, especially when you forget about the added costs discussed. While lenders carefully analyse your home loan application to ensure that you can afford your monthly repayments, they may not account for every little detail or expense.
It is also easy to end up with a larger loan than you initially intended. When shopping around for homes, a $260,000 property may not seem like a significant jump from a $250,000 property. However, that extra $10,000 may result in an additional $100 per month on your home loan repayments.
Before applying for a home loan, you should use a home loan repayment calculator to work out how much you can afford. The general rule is to avoid spending more than 50% of your take-home pay on necessary expenses and bills.
These necessary expenses include home loan repayments, credit card bills, utilities, phone bills, car payments, health insurance, and even groceries. These are the expenses that you cannot live without.
Not Saving up for a Larger Deposit on the Home
The size of your deposit impacts the entire home loan approval process. With a minimal deposit, you are more likely to need to pay lenders mortgage insurance (LMI) and may end up with a higher interest rate for your loan. These factors result in added costs over the life of your loan.
Lenders typically want borrowers to deposit 20% or more of the property’s value. For a $300,000 home, 20% would be $60,000. These deposits are out of reach for many first time home buyers. However, it is worth the effort to save as much as you can toward this deposit, even if you do not reach 20%.
With a minimal deposit, you have less equity in your home when you first take possession of the property. If you decide to move within the next few years, you may end up losing money on the deal.
Not Researching the Neighbourhood Before Buying
Buying a home when you may move within a few years is not a good idea. You do not have the time needed to build up more equity. One reason why some homeowners end up moving quickly after purchasing a new home is that they did not research the neighbourhood.
You may find that crime is worse than you imagined or that there is nothing within walking distance. You should take the time to drive around the area and find out the location of the nearest stores, parks, and hospitals.
You should also research the crime statistics. You may either talk to the local police, talk to others in the neighbourhood, or search for crime statistics online.
Avoid These Mistakes to Avoid Losing Your Home
These mistakes are not minor. When you end up forgetting about the added cost of home ownership, borrow more than you can afford, and skip a deposit, you are more likely to end up with monthly repayments that you cannot pay each month.
When you stop making your payments, you risk losing your home that you just went through so much trouble to purchase. If you want to avoid foreclosure, learn from these mistakes.
Remember to factor the various costs related to owning a home, such as maintenance and utilities. You should also estimate your monthly repayments and try to save up for a larger deposit.