When I bought my home six years ago, I found it both exciting and fun. If you buy a new property, as long as you have the budget, you can often customize it to your heart’s content. If you buy a resale property like me, you can choose to buy in a neighbourhood with everything that you’re looking for (provided it’s in your budget).
While I found house hunting a lot of fun, there were some costly mistakes I could have made along the way. I’m not perfect. I made some mistakes, but luckily nothing too big. (That’s why I wrote a book so other homebuyers wouldn’t repeat some of these bigger pitfalls I came across.)
Without further ado, here are five common mistakes by first-time homebuyers and how to avoid them.
Mistake #1: Not Getting Preapproved for a Mortgage
Before going house hunting, make sure you’re preapproved for a mortgage. Without a mortgage preapproval in hand, you won’t have any clue about how much you can spend on a property. You could spend $600K on a home, only to find out a lender will only approve you to spend $550K, leaving you scrambling to make up the shortfall. Don’t let this happen to you.
Here’s another reason to get preapproved. You’ll take advantage of a rate hold. When you have a rate hold, if mortgage rates go up while you’re preapproved (which is usually between 90 and 120 days), you’re guaranteed the lower rate (or the spread if you’re pre-approved for a variable rate mortgage). You have absolutely nothing to lose.
And just because your lender preapproves you to spend $550K on a home, doesn’t mean you have to spend that amount (or if you’re pushing your luck, even more). Take the time to create an imaginary budget if you were already living in the property. Account for housing related expenses like your mortgage payments, utilities, property taxes and home insurance. (If you’re unsure of how much to put aside, ask your parents if they’re homeowners or speak with your mortgage broker.)
You’ll want to plan ahead in case you run into financial difficulties or costly home repairs like a leaky roof. The last thing you want is to be “house rich, cash poor,” with little money to save, let alone have fun.
Mistake #2: Not Budgeting for Closing Costs
If you’ve never bought a home, it’s easy to overlook closing costs. I almost made this error myself. I wanted to contribute every penny towards my down payment, so my mortgage would be as low as possible. Luckily my mortgage broker said that I should keep some money for closing costs. I’m glad he did, otherwise I would have found myself in a financial pickle and I would have had to borrow the money from my parents. Not a good start to being a homeowner.
Closings costs are anything but insignificant. Closing costs typically add up to between 1.5 and four percent of your home’s purchase price. For example, on a $550K home, you’d be spending up to $22K on the “transactional costs” of real estate. And it’s up to you to save that money ahead of time. Your lender won’t foot the bill.
The most prevalent closing costs for first-time homebuyers are land transfer tax, real estate lawyer fees and home inspection fees. As a first-time homebuyer, you may receive a rebate on land transfer tax depending on the province you live in, but closing costs can still add up to a lot. Don’t overlook them!
Mistake #3: Buying a Home Based on Looks
Buying a home based on looks is a lot like dating based solely on looks. Sure, looks matter to an extent, but other factors like compatibility matters, too.
When you walk inside a home for the first time, it’s easy to fall in love at first sight and focus on the wrong things. Sure, it’s impressive if a home has a new kitchen with granite countertops and stainless steel appliances, but what about the “bones” of the home? The roof, windows, furnace and structure. Anyone can pay someone to put in a new kitchen, but if the roof is falling apart, is this a place you want to call home? Are you willing to sink the money into fixing it up? If a home is a flip, corners may have been cut to save time and money. Pay attention to everything to help avoid buying a money pit. It also helpful to hire a competent home inspector, which we’ll discuss next.
Mistake #4: Skipping a Home Inspection
In competitive housing markets, some homebuyers are skipping the home inspection. When you find your dream home and 10 other buyers are also interested, it’s tempting to skip the home inspection and go in with a clean offer (an offer without any conditions). While a clean offer can help you get you your dream home, you’re also leaving yourself open to all sorts of costly repairs you may not have anticipated. For instance, the home could have structural issues that only an inspector might notice or a chimney that’s leaning (this happened to me).
A home inspection is money well spent. You’re making the single largest financial transaction of your lifetime. If you’re afraid you might lose the house if you include a condition of inspection, why not do the inspection ahead of time? That way if the inspection looks good, you can make an offer on the home with the peace of mind knowing that you’re investing in something that’s rock-solid.
Mistake #5: Choosing the Mortgage with the Lowest Rate
When you go to the car dealership, do you buy the car that’s the lowest price? Of course not! You consider other factors like make, model and fuel economy. So, why do so many homebuyers do the exact same thing when they’re shopping for a mortgage? They look for the mortgage with the lowest rate when there are so many other things to consider – mortgage penalties, prepayments and portability to name a few.
A lot of first-time homebuyers don’t care about mortgage penalties, but here’s why you should. Six out of 10 Canadians who sign up for a five-year fixed rate mortgage break it before the end of the mortgage term. If you asked those 10 Canadians whether they’d break their mortgage when they first signed up for their mortgage, I’m willing to bet all 10 would have said no.
That’s why it’s crucial to choose a mortgage with a fair mortgage penalty. That’s where a mortgage broker can come in handy. He can help you choose the ideal mortgage based on your financial situation. You’re probably better off paying a slightly higher mortgage rate if it has other features that are important to your like prepayments and a lower penalty.