First-time homebuyers can get easily side-tracked by fixable "problems," like an unappealing paint color, and they often overlook hidden costs of home ownership like maintenance expenses. Such rookie errors are hardly their own fault, since they lack the experience that comes with owning property over time. With low mortgage rates luring many newbies into the marketplace, we gathered up four of the classic mistakes they tend to make:
1) Being turned off by problems that are easily fixed. According to a survey by Coldwell Banker, almost nine in 10 first-time buyers are looking for move-in ready homes. They don't want to have to fix the kitchen or redo the bathroom before settling in. They also want to live near shops, their work and "highly-rated" schools.
While location isn't negotiable, many smaller fixes are, such as a dirty carpet or scratched hardwood floor. Jane Hodges, author of the book "Rent Versus Own," was concerned about cracks in the plaster of her first home, but she later found they were just a cosmetic blemish that could easily be painted over. Hodges suggests asking your real estate agent for help understanding how costly fixes will be and to grill the home inspector as well. "Buyers sometimes focus on things like carpet, but that's really a renter's mentality. They forget you can make all these changes," she says.
The buyer-friendly market means that many first-time buyers can satisfy their high standards. Most participants in the Coldwell Banker survey of 300 first-time buyers found they could buy a home sooner than they expected – and at a better price than they expected. Four in 10 got more space and half scored a neighborhood that exceeded their expectations.
The lesson: High standards can work to your advantage, but don't forget that some fixes, like cosmetic makeovers, are relatively easy (and cheap).
2) Overlooking hidden costs. In addition to the down payment and subsequent regular mortgage payments, home ownership also brings a slew of other expenses, from closing costs, to appliance maintenance, to homeowners insurance. That's why Hodges warns against doing a simple comparison of monthly rental payments versus mortgage payments. Home maintenance typically costs 1 to 3 percent of the purchase price, which is as much as $9,000 a year on a $300,000 home. "If your motivator is that rent is going up, you need to think about the actual operating costs," Hodges says. "Homes might not be as cheap as they look," she adds, especially if you buy a distressed property that hasn't been well-cared for in recent years.
The lesson: Leave plenty of room in your budget to absorb the extra expenses of homeownership. That usually means borrowing far less than the bank approves and taking expected income fluctuations into account.
3) Failing to budget for DIY projects. Not so long ago, do-it-yourself television shows and Home Depot ads lent an air of romance to giving your home a little TLC. But more recently, the art of fixing up houses has fallen out of favor. According to market research firm Mintel, the DIY home improvement market has fallen 21 percent in the last 10 years. The reason appears to be financial. While about one in four would-be-DIYers say they want to start on a major renovation, they simply can't afford it right now.
The lesson: When purchasing a home, reserve some cash for needed DIY projects during the first year of home ownership.
[See: 50 Smart Money Moves.]
4) Misunderstanding new homeowners insurance coverage. New homeowners often falsely believe that their homeowners insurance covers flooding, for example. A 2012 report from the Consumer Federation of America found that consumers are often surprised by their expenses, including deductibles and coverage gaps, after they experience an event, such as a hurricane or fire, that requires them to work with their insurance company.
The lesson: Read the fine print of your insurance coverage, and if you don't understand it, talk it through with your agent or insurer.
Since there are bound to be plenty of unexpected costs during that first year of home ownership, padding your budget can prevent late-night panic attacks when the dishwasher starts leaking all over your new floor.