Hey all. I have another guest post for you today! This post comes to from Jake Jones of Thinkhub.
Home buying is often considered a key part of wealth building. Whether or not you agree, for most homeowners, buying a home is the single largest purchase of their lives.
And so, obviously buying a home is a very big deal. As such, being adequately prepared is very important. The last thing you want is to dive feet-first, unaware of what lies ahead.
Hopefully, these lessons from Jake can help you be better prepared if you are considering a home purchase in the future.
Thanks again Jake for this post. I hope you all enjoy it!
7 Reasons We Weren’t Prepared to Buy Our Home
A lot of the time I tend to focus on the things that I am or should be doing with my money. However, after giving this podcast a listen I am realizing that talking about mistakes is just as important.
One of my BIGGEST financial mistakes was the purchase of my house. Luckily I have not paid dearly for it, but the lack of consequence does not mean it wasn’t a mistake. There is a list of things that I did poorly with this purchase–things I intend to do better next time.
So here it is in all of its glory, the 7 reasons why purchasing this home was a mistake.
1. No Emergency Fund
If nothing else we should have gone into our new housing venture with a little extra cash. Alas, we did not.
Shortly after getting my first salary job making 45k per year we decided to buy our home. The job was started on January 1st and if memory serves correctly, we closed on March 23rd. Basically, I started making A LOT more money–doubling my income at the time. Then we almost immediately began spending more.
Doing this in such a short period of time meant that we did not take the time to save up money in case of emergencies. Not even a few hundred dollars. Honestly, our last few dollars before closing were spent on various things for the house.
Luckily we did not end up paying dearly for this mistake, but all it took was 1 large appliance breaking to put us in the hole. Here is the scary part.
A recent survey by HomeServe USA reveals 25% of homeowners don’t have savings set aside for major household repairs. Nearly half of homeowners (48%) have had an emergency home repair in the past 12 months, according to the same survey.
So we were part of the 25% of homeowners that had no savings set aside and we had nearly a 50% chance of needing to do an emergency home repair.
Looking back there is only one way to describe our decision… stupid.
If you or I cannot manage to save an emergency fund before buying a house, then we probably don’t have the discipline for homeownership. I know that for my wife and I this was the truth.
2. We Put Nothing Down
As if having no emergency fund was not enough, we also put nothing down on our house. Well I say nothing, we put down a little, but it was pretty darn close to nothing. Our realtor managed to find a grant for us which I believe gave us close to $1,000, then we had to put down around $500 out of our own pockets.
The reality is, with the time that we spent looking we should have been able to put down more than $500. On top of that, we should not have jumped into owning a home so quickly after getting a new job. Putting down nothing just meant more principle to pay interest on for 30 years.
At the time of this writing, we have paid our home down from $155k to ~$134k. That is about $20,000 paid off. This has taken us 4 years and 8 months. My friends, this is an absolutely absurd thing we have done considering that with no kids at the time and two full-time incomes we could have easily saved up $20,000 in 2 years.
Of course, hindsight is 20/20. Looking back there was a lot we were doing wrong. We had not even created our first budget or started our journey to find the right budgeting tool for us. If had it to do over again, I would have waited and saved a sizeable down payment.
3. Used an FHA Loan
With the small amount of money that we put down, you probably could have guessed we used an FHA loan. It was not all bad, we did get a 2% interest rate which is pretty nuts, but we had great credit and borrowed far less than we were approved for. In the end our mortgage payment ended up being about $1,000 with everything going into escrow. The bad part is ~$150 of that goes to mortgage insurance premiums.
For anyone who does not know, with a conventional loan you have to pay PMI (private mortgage insurance). In most cases these payments have to be made until you hit 80% loan to value (LTV). Once you reach that ratio, the insurance can be removed from a conventional loan.
The case with an FHA loan is different. MIP (mortgage insurance premiums) have to be paid for the life of the loan. If you ever want to remove the MIP payments, you will need to refinance.
Right off the bat we are paying ~$150 per month with the expectation of refinancing in the future.
Approximate MIP paid to date – $8,700
Estimated cost of refinancing – $1,500
In the end, we will be paying the price for refinancing and lack of a down payment. Together, the cost of refinancing (in the future) and the cost of MIP to date is ~$10,200. That may seem like a small amount to some, but for us it would have easily covered the cost of one of the vehicles we purchased last year. If not that, maybe rennovations or a few extra mortgage payments. �
The point is, saving enough for a conventional loan would have been easy. Our lack of patience will cost us over $10k.
4. Did Few Inspections
Home inspection – the phrase just fills everyone’s hearts with joy. Nothing like paying someone to come to your house for an hour and poke around just to tell you everything is fine.
My father-in-law ended up doing our inspections and he did a great job. However, the responsibility of making sure that everything was in order was ours and I do not think we did it well. First, we only did the required inspections. In reality there were many more inspections we could have paid for.
- Electrical inspection
- Heating and air conditioning inspection
- Roof inspection
- Sewer and septic inspection
- Water and plumbing inspection
Not all of these inspections would have helped us, but they are inspections I wish we would have considered. Here are the ones that would have helped and why.
- Electrical inspection – After moving in we found several outlets do not work well and need to be replaced.
- Sewer and septic inspection – There is a cap missing to an access pipe in our yard. It could cause drainage issues.
- Water and plumbing – Some issues with plumbing exist. Our sinks seem to be prone to “build up” and need to have drain cleaner used on them frequently. Also after having a plumber friend look at our pipes, they are not run in the most effective way.
Sure it is just a few items, but all of the things above could have been very helpful to know before buying the house. Buying a home means more risk and upkeep costs for the future, past Jake just didn’t think about that.
5. We Used Seller Help
Seller help is fairly simple. Essentially the seller pays the closing costs and the payment for the home is increased.
If the home is $150k and the closing cost is $5k, the buyer would pay $155k for the house. Then the seller would pay closing costs and be reimbursed with the additional $5k paid for the home.
I do not think seller help is a terribly bad thing. However, it did set us back and increase the cost of our home significantly. Using seller help does not mean increasing the cost of the home by a fixed amount, we are also paying interest on that amount. Additionally, we have an increased period of time that MIP will be paid before we can refinance.
Avoiding seller help is a good idea because it means more preparation and saving money in the future. I would not fault anyone for using it, but I would urge you to aviod seller help if you will be using an FHA loan and paying MIP.
6. Didn’t Talk to Neighbors
I know, this is a terrible one. ☝️
Honestly, this would have impacted our decision more than any of the other mistakes. Simply knocking on a few doors to meet the neighbors and learn more about the neighborhood is key.
Why do I say this?
Well, after moving in we discovered that a neighbor just two doors down is a drug dealer. What this means for us is
- Undesirable foot traffic
- Increased crime
- Less safe environment for kids
At the time we didn’t have children, but we should have been thinking about the future. If we would have just knocked on the closest 3 neighbors we would have met the drug dealer and immediately be put off. After all, what will that be doing to our home value?
Even if we didn’t knock on that particular door, meeting the neighbors and asking about the neighborhood could have revealed this information. This was a huge oversight for us, talking to neighbors is something I will definitely be doing in the future.
7. Jumped in too Fast
We did not begin looking at houses until January of 2014 just as I was starting my first salary job. As stated above, it was shortly after that on March 23rd that we closed on our house. Closing took about a month after our offer was accepted meaning that we took less than 2 months to look at homes.
Today, I feel like I would be fine looking for 2 months, but 5 years ago it was a mistake. Why?
Well, I knew very little about houses, buying a home, loans, insurance, etc. If we would have taken more time to look and fully understand the financial responsibility of each potential home it could have led to better decisions. Not to mention, we probably could have found a better deal if we really got serious about looking. There seems to be an art to finding a deal and I do not believe 60 days is enough time to begin to understand it.
Another problem, we did not know what we wanted. This was true when it came to our futures and in a home. We looked at ALL types of homes and used no real filter of our own to determine what we did and didn’t want. Then when it came to our future we had no clue where we wanted to be in the next 5 years, we just wanted a home.
Lastly, after understanding what we wanted out of our future we should have used that information to find the right realtor. Someone whose passion and goals aligned with our own, or at the least someone who could provide us exactly what we needed to meet our goals. Our realtor when we bought our home was great, but we had no idea what we really wanted. That makes it difficult to find the right person.
Buying a home is a huge commitment. After all of my mistakes I know that in the future my requirements for buying a home will look something like this:
- Have an emergency fund
- Save up a down payment
- Use a conventional loan
- Consider all applicable inspections
- Use seller help only if we can still avoid PMI
- Speak to at least 3 neighbors before purchase
- Take it slow, don’t get too excited, and go in using our goals as a filter
Putting all of this information out there and outlining all of our mistakes is not easy. Heck, some of the stuff that we did was just plain stupid, but in the end we learned valuable lessons. I hope that you can take something valuable from our experiences and use it to have a great home buying experience and bright financial future.
Have you made any of the same mistakes we made? Or maybe a few different ones? Please feel free to share them in the comments!