I think everyone who has cable has seen House Hunters at least once in their life. The basic premise of the show is someone is looking to buy a new home.
The real estate agent shows the buyer three potential homes. The buyer puts an offer in on one of the homes and ends up buying a house!
I’ve always enjoyed watching the show to see how much real estate goes for in various areas of the country and world, but there are 5 financial mistakes that I see people on House Hunters making often and it drives me crazy!
1. The Buyer’s Budget Is The Maximum Amount The Bank Will Lend
Classic rookie house buying mistake. The bank doesn’t care anything about your budget or what you can truly afford. Banks simply tell you the maximum amount you can borrow based on metrics that don’t consider your individual situation.
Instead of listening to the bank about what your maximum budget is, you should make your own budget independent of what they bank says. Take a look at your income and expenses and see what would be a comfortable monthly payment for your situation.
Keep in mind, the less you spend on housing, the more you can save for retirement or another goal.
2. Buyers End Up Buying Homes Above Their Budget
Due to the way budgets are determined on House Hunters (according to the bank) this mistake drives me even crazier! Once you set a budget, don’t exceed it with out a ton of thought.
People get emotional about houses and think they’ll never find another one they love. Don’t be that person. Instead, keep looking for another house that meets your criteria that is in your budget.
If your perfect home doesn’t exist in your price range, you either need to adjust your expectations or your criteria. Adjusting your budget without a ton of hard thought can make you house poor.
3. Get A Fixer Upper? You Can Use The Rest Of Your Budget For Renovations!
This one drives my up the wall and probably the same one they’re planning on knocking out. People get a maximum budget they can borrow from the bank and then they decide that if they buy a house under the budget, they miraculously can spend the rest of the money up to the max budget on renovations.
For example, a buyer has $40,000 cash for a down payment and the bank will lend then $160,000 for a total budget of $200,000. The buyer decides to buy a $180,000 house, so now they think that they have $20,000 to spend on renovations. Wrong! They might have saved $4,000 on a 20% down payment, but they definitely don’t have another $20,000 of cash out of a mortgage from the bank.
This would be accurate if you were buying a house for cash but I’d be willing to gamble most people on the regular House Hunters show will be taking out mortgages. In most cases, banks won’t lend you extra money above the value of the home to do renovations that won’t increase the value of the home.
4. Buyers Get Into Emotional Bidding Wars
Emotions and large purchases are two things that should never be combined. Unfortunately, many people get emotionally attached to homes they look at and end up spending much more than they should on a home.
If there are two bidders who both love a home, things can get out of control quickly. House buying shows like House Hunters often features these situations when people go above their budgets to buy a home in a bidding war. Don’t do it.
Instead, set a maximum amount you’ll pay for a house before you make your first offer. Try to negotiate and get a better deal, but never go above your maximum price you’re willing to pay for the house simply because you’ve become emotionally attached.
5. Not Having A Decent Sized Down Payment
Not having any down payment at all when you’re buying a house is just financially irresponsible, but I’ve seen it on these shows multiple times. The show reports the buyer has $3,000 in total savings (yes, total) and they’re ready to buy a house for the pre-approved mortgage amount of $150,000. Insane!
There are rare cases where buying a home with no down payment may work, but 99.99% of the time the person is setting themselves up for financial hardship. Don’t do it.
In addition to at least a 10 to 20% down payment, home buyers should have an emergency fund to cover any unexpected expenses including potential job loss. It’d suck to buy a home and then get foreclosed on in a year or two because you lost your job.
To me, it is crazy that people don’t do more research about how the home buying process works before they buy a house. You need to understand the whole process, including the process of figuring out how much house you can afford. Remember, it isn’t what the bank says, it is what works best for you!
What financial mistakes do you see people making on shows like House Hunters? Have you ever made any of these house buying mistakes yourself? I’d love to hear your thoughts in the comments below!
Image courtesy of ChicagoGeek, Edited by Tori.