Yahoo Finance 5 Financial Downfalls of Buying a Starter Home
The traditional way of buying a house has always been to purchase a starter home -- buy something small, and once your family gets too big for it, sell it and find a new, bigger house. It's a perfectly good plan, assuming everything goes to plan. But because a house involves so many financial factors, there's no guarantee that everything will work out as you'd hoped.
So before you purchase a starter home, keep these tips in mind.
Look for the loan, then the house. When you look for a house before looking for a loan, it's very easy to assume you can afford a bigger starter home than you can, fall in love with a place and then get disappointed when you can't swing it.
But even if you can afford it, it's simply smart to have your financing in place first, says Ori Zohar, co-founder of Sindeo, a mortgage brokerage and lender.
"Many deals fall apart because of delays in securing your home loan," Zohar says.
Rushing through a loan can also mean overpaying, Zohar adds.
It just makes sense, especially if this is your first home, to go through the process slowly. "For most of us, buying a home is the biggest financial decision of our lives," Zohar says.
[See: 10 Tips to Sell Your Home Fast.]
Make sure you have a plan for selling the home. You're buying a starter home, which means you plan to move out at some point. Which also means you should be thinking about moving out even when you're moving in, according to Kylee Della Volpe, a writer and editor for Mortgages.com, a consumer website with information on mortgages, and buying and selling homes.
"One of the biggest mistakes we see people making with their starter homes is not having a long-term plan," Volpe says. "If it's truly a starter home, they should go into it with a plan for how long they want to be in the home and whether they'll sell it eventually or keep it as a rental."
After all, if you aren't paying attention, you could buy a starter house and have bad luck with your money situation, like getting into too much debt or having the primary earner lose his or her job. Either situation could bring down your credit score and make it harder to move out.
You also want to think about whether other people will find your home and neighborhood as charming as you do, if you're not planning to stay forever, Volpe advises.
"Be strategic about buying in an area that has the potential to grow over the time," she says.
[See: 10 Ways Millennials Are Changing Homebuying.]
Don't ignore the inspector's report. Many people get that report, notice a problem and then they shrug their shoulders and purchase the home anyway, according to Teisha Powell, a real estate attorney and agent in Miami, Florida.
Powell says she almost isn't even sure why first-time homebuyers, in particular, bother with getting a home inspector's report, given how many of them ignore the reports.
"For example, the report might say that the air conditioner is on its last leg. The first-time homebuyer will still end up purchasing the home," Powell says.
And why would they do that?
"They are so in love with the home and the idea of purchasing a home, that it won't matter what the inspection says," Powell says.
Then, later, when the air-conditioner actually breaks, homeowners get upset, Powell says.
She adds that if there are potential expenses that will come up sooner rather than later, you should negotiate the price further down to make up for the fact that you'll soon be replacing something or making improvements; if the seller isn't willing to negotiate, you should walk away.
[See: 12 Habits to Help You Take Control of Your Credit.]
Don't overlook the other financials. There's a lot more to buying a house than getting approval from a financial lender.
"One common theme I see among first-time homebuyers is underestimating closing costs and other additional expenses aside from the purchase price of the property," says Julie Park, a real estate agent with Level Group, a New York City real estate brokerage firm. "People need to consider moving expenses, potential repairs or renovations and the creep factor involved as things end up over budget."
She points out that your utilities or property tax might be far more than you expected. "These are all things that can make the difference between filet mignon or ramen noodles for dinner," she says.
Buying too big of a starter home. Some people buy the best starter home their money can buy -- which brings trouble later, Powell says.
Going a little bigger than you should may not be a big deal if you love your starter home so much that you don't really care if you stay there for good. But if you want it to truly be a starter home, you need to think small. You also need to buy something very affordable.
"They buy as much home as they can, but this is not the home they want," Powell says of some first-time home buyers, explaining that if you go that route, your finances and credit can suffer because you're always cash poor. If you're always cash poor, you may see your credit score drop, and future lenders might see you as a risk for another, bigger home loan.
Or you may find that you over-invest in your starter home, making so many improvements that you feel like you can't justifiably sell it, or can't sell it for a profit. Before long, that starter home? It becomes a permanent home.
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