3 Common Mistakes First-Time Homebuyers Make

As first-time homebuyers, it's important to be aware of the common mistakes that can hinder your experience. In this article, we will discuss three such mistakes and provide practical tips on how to avoid them.

1. Not Having a Plan:

One of the most prevalent mistakes first-time homebuyers make is diving into the process without a well-defined plan. While it's good to conduct preliminary research, it's crucial to arrive at your appointments prepared. Make sure you bring the following

• Your max budget (more on that below)

• What neighborhoods or areas you are interested in

• What your non-negotiable must-haves are

• What your nice-to-haves are

The problem arises when you lack clarity on your requirements and end up being swayed into buying a house that doesn't meet your criteria.

For instance, arriving with a budget and a target neighborhood but without a list of must-haves may result in purchasing a house that fails to make you happy. On the other hand, having must-haves and a preferred neighborhood in mind, but no clear budget, can lead to buying a property beyond your means.

One way to avoid this mistake is to keep reading this blog post subscribe for future updates!

2. Buying too much home.

A second common mistake is purchasing a home that exceeds your needs and financial capabilities. Unlike renting, owning a home comes with added responsibilities and expenses. As a homeowner, you can't easily walk away if your financial circumstances change. Additionally, there are numerous costs to consider that you might not have anticipated as a renter, including:

• Home insurance

• Property taxes

• HOA fees

• Repairs & maintenance (repainting, staining the deck, repairing the roof, pest control, addressing a rotting beam, etc).

• Upgrades (improving the air conditioning, adding lighting, upgrading the electrical, etc)

• Landscaping

These expenses can quickly accumulate. For example, my partner and I added AC to our home, and the total cost came to $10,000 (upgrading the electrical, adding the AC unit, new coils, and thermostat). Coming from renting, where such upgrades are not your responsibility, we found this to be quite a shock. As a homeowner, it is essential to have a sufficient financial cushion to cover these expenses.

To ensure this, it is best to approach home buying with a firm budget. The widely recognized "28% Rule" advises spending only 28% of your gross income on housing, encompassing mortgage principal, interest, taxes, insurance, and other mandatory costs like HOA and home maintenance. I explain this rule in more detail in another post. I also have a convenient 28% Rule Calculator for Google Sheets and Excel that you can use!

3. Investing your down payment incorrectly.

The final common mistake involves mismanaging your down payment funds. As a first-time homebuyer, you may be young and have been advised to invest all your money in high-growth (high-risk) stocks. While this might be suitable for long-term investments, it may not be appropriate if you plan to purchase a home within a few years.

Once you determine your timeline, consider reallocating your investments into safer assets. For instance, if you have $150,000 saved with $90,000 allocated for the down payment and initial housing costs, you can move that $90,000 into a safer allocation while leaving the remaining $60,000 in a more aggressive allocation for your long term savings.

I personally experienced this mistake. When my partner and I began our housing search, we neglected to monitor our investments, which were predominantly in broad stock market indices. Unfortunately, during that time, Russia invaded Ukraine, resulting in a market decline that affected our down payment savings. We were unable to recover a portion of our funds before needing to provide the down payment.

On the other hand, I frequently encounter online advice suggesting the entire down payment be kept in a high-yield savings account for an extended period. While this may work for short-term savings, it may not yield sufficient returns when saving for a down payment over a long period. For most of the 2010s, the interest rates on high yield savings accounts were well below 1%, whereas home prices grew by 4% per year, and some markets were pushing 10% annually. When the return on your savings underperform the rate of home price increases, your savings would constantly be falling behind the real estate market.

Instead, I advise my clients to use an investment portfolio that can match home price inflation while minimizing risk. I like to use a mixture of money market funds, short-term bonds, and broad market and real estate ETFs. I will share a future post with more information about that!