Buying your first home is exciting, but many buyers are primarily focused on one number: how much they’ll get approved for. Mortgage pre-approval is an important step in the process, but it doesn’t always reflect what makes sense for your long-term finances and lifestyle.
Two common mistakes first-time buyers make are overbuying and underbuying. Overbuying occurs when a buyer goes too far out of their budget to purchase a home. Underpurchasing occurs when a buyer purchases a home that no longer meets their needs within a few years.
Whether living in a condo in Denver or a house in Miami, understanding the tradeoffs between these two pitfalls can help buyers make more balanced decisions and choose a home that supports both their current lifestyle and future plans.
What does it mean to overpurchase when purchasing a home?
Overpurchasing occurs when a buyer buys more homes than they can afford. This often means buying at the maximum of your approved mortgage amount, or buying more than your day-to-day budget can reasonably support. “First-time homebuyers often have very high expectations for their first home and end up buying too much they don’t really need or paying too much along the way, which they later regret,” said Bradford Miller, an attorney at Bradford Miller LLP.
Lenders determine how much buyers can borrow based on income, debt, and credit, but that number doesn’t necessarily reflect the full picture of affordability. Mortgage approvals typically do not take into account a person’s spending habits, cost of living, or long-term financial goals, such as saving for retirement or building an emergency fund.
As a result, some buyers find themselves financially burdened each month, even though they technically have a home that qualifies for loan approval.
Signs of buying too much
Warning signs that a home purchase may be beyond your budget include:
Monthly housing payments leave little room for savings or emergency expenses. You’re relying on future raises, bonuses, and financial changes to buy a home. You’ll be cutting down on a major living expense just to pay your mortgage. After paying the down payment and closing costs, there is very little cash left.
If buying a home significantly reduces your financial flexibility, it could be a sign that home prices are out of your comfort range.
Risk of overpurchasing
Buying a home that costs more than you can afford can lead to long-term financial pressure. In addition to the mortgage payment, homeownership includes ongoing expenses such as maintenance, repairs, property taxes, and insurance.
If your household budget is already stretched to its limits, unexpected expenses like replacing your roof or repairing a major appliance can quickly become difficult to manage.
Overpurchasing can also increase financial risk during times of economic uncertainty. If your income changes due to job loss, reduced work hours, or other unforeseen circumstances, large housing payments can make it difficult to maintain financial stability.
What does it mean to underpurchase a home?
Overbuying has gotten a lot of attention, but underbuying is also a mistake that first-time buyers make. Underpurchasing occurs when a buyer selects a home that is well below their financial means and later realizes that the property does not meet their needs.
This often occurs when buyers are focused on keeping costs as low as possible. They may choose a smaller home, fewer features, or a location that doesn’t align with their long-term plans.
While a lower purchase price may feel like a financially safer decision at first, it can quickly become a housing constraint if your circumstances change.
Signs you may be undervalued
Your home purchase may fall into the underpurchase category if:
The house is already too small for your current needs. It lacks important features that we expect to need in the near future. We plan to move again in the next few years. The cost of renovations needed to improve your home will outweigh the initial savings from buying cheaper. This location limits your long-term lifestyle and commuting needs.
If buyers compromise too much on space, location, and features, the home may only work as a short-term solution.
Risk of underpurchasing
Underpurchasing can create its own financial challenges. If your home no longer suits your needs within a few years, you could find yourself incurring moving costs again sooner than you expected.
There are transaction costs involved in selling a home, such as agent commissions, closing costs, and any potential repairs or upgrades needed to get the property ready for sale. If the buyer quickly moves again, these costs can reduce the financial benefit of purchasing a less expensive home in the first place.
Many buyers look to renovate smaller or older properties to suit their needs. In some cases, renovation costs can outweigh the initial savings from purchasing a less expensive home.
How first-time buyers can find the right balance
Avoiding both over- and under-buying requires a thoughtful approach to budgeting and long-term planning. “First-time homebuyers need to understand that they probably won’t find a home that meets every desire on their list,” Bradford says.
“Rather, your first home should be a stepping stone to future opportunities. It’s important not to overinflate your budget, but it’s also important to avoid buying too conservatively and ending up with a home that no longer meets your needs in the short term.” Buyers should consider how the home purchase fits into their broader financial situation, rather than focusing solely on loan approval limits.
1. Create a realistic home purchase budget
Start by estimating the total cost of owning a home, not just your mortgage payment.
A realistic budget should include:
Mortgage principal and interest
Fixed asset tax
homeowners insurance
public works
Regular maintenance and repairs
Homeowners Association (HOA) Fees (if applicable)
Focusing on the total cost of homeownership can help buyers determine a manageable monthly payment amount, rather than being financially constrained.
2. Plan for life changes
A home should ideally support your lifestyle for several years. Consider factors that may affect your housing needs in the near future, such as changing jobs, remote work arrangements, or other changes that may affect how much space you need.
By thinking ahead, buyers can avoid choosing a home that becomes impractical sooner than expected.
3. Leave room for financial flexibility
Maintaining financial flexibility is an important part of sustainable homeownership. Ideally, buyers should have enough savings left over after closing to cover:
emergency expenses
regular home maintenance
unexpected repairs
Leaving room in your budget for these costs can reduce stress and help you manage the responsibilities that come with homeownership. “First-time homebuyers may want to consider a five-year ARM to get a lower interest rate, as they are likely to live in their first home for less than five years,” advises Bradford.
“It’s all about balance. Try not to buy more home than you realistically expect to use over the next five years. For example, if you’re single, you might not need a three-bedroom condo or house. Many first-time buyers plan to move within the next few years, so it often makes sense to choose a home that comfortably meets their needs in the meantime.”
4. Consider resale value
Even if you plan to live in your home for many years, resale value is still important. Homes in desirable locations, with functional floor plans and strong local demand may offer more flexibility as circumstances change.
Choosing a property with broad market appeal will make it easier to sell if you decide to move in the future.
Questions first-time buyers should ask themselves before making an offer
Before you make an offer on a home, it may be helpful to evaluate how the purchase fits into your overall financial situation.
Ask yourself:
What is not only technically affordable, but what do you feel comfortable with your monthly housing payments? How long do you realistically plan to live in this home? Will this house still meet my needs in five years? Will my savings remain after the store closes? Will I feel safe with this payment even if my expenses increase?
Taking the time to answer these questions will help buyers make a more informed decision.
