Millennials currently represent the largest share of homebuyers, according to an analysis by the National Association of Realtors. Almost one-third of all homebuyers, and 68 percent of first-time buyers, were 34 or younger last year. And those numbers are expected to grow. Be sure to avoid the three common and potentially costly mistakes below.
1. Overestimating what you can afford
First-time buyers tend to focus on the down payment and monthly mortgage amount when they calculate how much they can afford, but they forget to factor in closing and other fees. It’s important to remember that monthly payments include not just the mortgage, but interest, taxes and insurance.
Be sure to get pre-approved for a mortgage loan so you know how much you can borrow from the bank before you make an offer on a home. But keep in mind that the amount you’re pre-approved to borrow could be more than you can actually afford once you factor in taxes, insurance and other costs like condo or homeowners’ association fees and maintenance.
As a general guideline, you want your total monthly payment (including mortgage principal, interest, real estate taxes and homeowners insurance) not to exceed 28 percent of your gross, or pretax, income. Some sellers are still asking for 20 percent down payments, but within the last year, it became possible to pay as little as 3 percent down. Just remember that the lower your down payment, the bigger your mortgage loan and the more you’ll pay in interest.
2. Letting your emotions get the best of you
Don’t get so attached that you buy with your heart and not your head. It’s easy to get attached to a property and end up spending more than you can afford. To avoid this, you should prioritize what you want in your home. Make a list of the most important qualities, such as a certain school district, updated bathrooms, a backyard, etc. Then figure out what you’re willing to give up. You won’t find the perfect home that meets your entire list so narrowing it down to what matters most can help you through your search process.
3. Not planning for the future
Once you’ve narrowed down your search and are ready to make on offer, check with your agent about the demand of the home you’re interested in. Is the home getting multiple offers? Has it been on the market a long time? Will it require a lot of upgrades?
Remember the resale opportunities for future homebuyers. Make sure you don’t excessively improve the property or over customize to your personal taste. One day, you’ll have to sell the house again and you want to make sure it’s neutral to other homebuyers.