Buying a home isn’t a single action, but rather a series of small steps that eventually lead to homeownership. It’s stressful, because each step in the process has its own challenges. But you can make the process go much more smoothly if you understand each step, and are prepared to deal with it individually.
Here are the seven hardest parts of buying a home, not only from my own personal experience, but also from my 15-year stint in the mortgage business.
1. Saving for the down payment
The savings rate in the US is so dismal that 62 percent of Americans couldn’t come up with $1,000 if they needed to. How does that work when one of those average Americans needs to come up with $10,000 or $20,000 or more, in order to make the down payment on a home?
Saving the down payment is often cited as the single biggest obstacle to homeownership. Even if you were to apply for a 97 percent mortgage — requiring just a 3 percent down payment on your home — you’d still have to come up with a minimum of $6,000 to purchase a $200,000 home — plus closing costs and required reserves.
Saving money isn’t easy, especially when you’re talking about many thousands of dollars. If you’re planning to purchase a home, set up a budget that includes a regular line item for the expected down payment, and give yourself as many months or years as you think it will take.
Read more: The best ways to save for a down payment
2. Selling your current home (if you have one)
This certainly doesn’t apply to everyone who is buying a home, but if you already own one it may be the single hardest part of buying a home.
There are several reasons why this is true. First among them is the fact that you are involved in two transactions, not just one. If you’ve ever purchased a home, you can probably fully appreciate how tough it would be to add a second transaction to the mix.
Another major issue is that it can be difficult to sell a home even in a strong market. Prospective buyers can be a finicky lot, and they don’t always qualify for financing. There can be one or more false starts on offers before the home is finally sold.
Then there’s the stress of having one transaction dependent on another. In most cases, the sale of your previous home will be a requirement for the mortgage on the new home. Any details on the sale of your current home that look at all shaky can cause an emotional roller coaster because the effect that they will have on the purchase of the new home.
You may be able to overcome this obstacle by coming up with a strategy to sell your current home before buying a new one. Not easy, but it can add a lot more certainty to the home buying process.
3. Improving your credit
Despite improving conditions in the housing market, mortgage lenders continue to be cautious in regard to borrower credit. To ensure participation in the widest number of mortgage programs, you should work to get your credit score up to at least the 700 level.
That won’t be easy if you have some recently impaired credit, or are carrying a little too much debt (which can also make it difficult to qualify for a mortgage based on your income).
Recognize problems and take time to improve your credit, to get it to where it needs to be to apply for a mortgage. Get a free copy of your credit report, and take a close look at any negative information that it reveals, and be ready to take action:
- If you have too much debt, work out a plan to begin paying it down or paying it off
- If you have any outstanding delinquent account balances, pay them off
- If there are errors, contact the creditors and work to get them corrected
- If you have some late payments, make sure that you pay all of your bills on time from now on for as long as it takes to increase your credit score
Like saving for a down payment, improving your credit will take time – be sure to give yourself as much of it as you need.
4. Finding the right house in the right neighborhood
This is a challenge under the best of circumstances. What you will often find is that the perfect house in the right neighborhood is beyond your price range. That means that you’ll need to compromise. It may mean focusing primarily on either the house or the neighborhood, but not both.
For example, if you have school-aged children, you might sacrifice finding your dream home in favor of moving into a neighborhood with better schools. If you don’t have children, finding the right house may be more important than the neighborhood.
5. Keeping yourself from overbuying
Even if you crunch numbers before you begin looking at properties, emotion has a way of taking over when you actually begin your search. You can fall in love with the property, and end up paying too much for it in the process.
Emotional decisions are often made on very fine details. For example, you could get locked into the fact that a house is located in a certain school district. You may decide to buy a certain house because you like the way the furniture is arranged in it. (Even though the furniture won’t come with the house!) You may even like the color, the window treatments, the fireplace, or the landscaping. None are major factors, but emotions can turn on any one of them.
Once you develop an emotional attachment to a house, it’s a short walk to paying more for it than it’s actually worth, or that you can reasonably afford. For that reason, you have to be sure that your emotions are not overwhelming the reality of the situation. The best way to purchase the right house for you and your family is to know how much house you can afford and how much cash you’ll need to close on a house before you begin shopping. Then, make your decision based on the facts, and not on emotion.
That will help you to deal with an extreme version of an emotional purchase process…
Related tool: Home affordability calculator
6. Avoiding a bidding war
This is one possible outcome of getting too attached to a certain home. It’s also happening a lot in certain overheated housing markets. If you make an offer on a house, and you end up in a bidding war with other prospective buyers, it just about guarantees that you’ll overpay for the property.
Bidding wars are one of those rare but unfortunate situations where the person who “wins” actually loses. He “wins” in the sense that he gets the coveted property. But he loses because he almost certainly pays too much to get it.
The last thing that you should want to do is pay more for a property than it’s actually worth. No matter how emotionally attached you are to the property, overpaying has serious long-term financial consequences.
For example, a mortgage lender will only give you a loan that is based on actual value of property, and not what you overpay for it. That means that if a lender will give you a loan equal to 90 percent of the property value, and the property is worth $200,000, they will give you only $180,000 for the mortgage — even if you bid the price up to $210,000 or $215,000.
That being the case, your down payment will increase from $20,000 to $30,000 or $35,000. And if property values don’t rise to meet that over-bid price, you will be out the equity for a very long time.
If you’re facing a bidding war on a property, politely withdraw your offer and move on to a less popular home.
Having moved across country a little over a year ago, and with the memory still fresh on my mind, moving takes top honors on my list. That’s because moving isn’t just about transporting your stuff from one house to another – it’s really about completely uprooting your life. There are literally hundreds of details that you have to take care of in order to make it happen.
It’s even more frantic given the fact that you typically have to do it within hours of closing on the house. That means you go from one source of stress to another. And if you have kids and pets, all that stress is magnified.
Read more: 5 stress-reducing tips for moving
So there you have the seven hardest parts parts of buying a home. But feel free to comment or offer any more that you can think of!