When I purchased my house in August 2012, I found it both fun and exhilarating. If you’re buying a new property, provided you have the budget, you can usually customize to your heart’s content. If you’re purchasing a resale property similar to me, you can choose to purchase in a neighbourhood with all the amenities that you’re looking for (again, as long as you can afford it).
While I found looking for a property fun (for the most part), there were some costly mistakes I could have made along the way. I’m not perfect. I made some mistakes along the way, but luckily nothing too costly. (That’s why I wrote a book so other homebuyers wouldn’t repeat some of these home buying faux pas.)
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 looking at properties, be sure you’re preapproved for a mortgage. Without a mortgage preapproval, you won’t have any idea about how much you’re able to 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 left to make up the financial shortfall. Don’t let this happen to you.
There’s another reason you want to get preapproved. You’ll benefit from a rate hold. When you have a rate hold, which is usually between 90 and 120 days, if mortgage rates go up during this time, you’re guaranteed the lower rate (or the spread if you’re pre-approved for a variable rate mortgage). You have nothing to lose.
And just because your lender preapproves you to go out and spend $550K on a property, doesn’t mean you have to spend that amount (or even more). Take the time to prepare a mock budget if you were already living in the home. Consider 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 mortgage broker or parents if they’re homeowners to get a rough estimation.)
Be sure 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 no money left over for emergency repairs.
Mistake #2: Forgetting to Budget for Closing Costs
If you’ve never purchased a home, it’s easy to overlook closing costs. I almost made this mistake myself. I wanted to put every spare 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 aside for closing costs. I’m glad he did, otherwise I could have found myself in a financial pickle and I may have had to borrow the money from my parents. Not a good begin homeownership.
Closings costs are anything but a drop in the bucket. They can add up to quite a bit. Closing costs typically add up to between 1.5 and four percent of the purchase price of a home. 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.
Some of the most common 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: Purchasing a Home Based on Looks
Purchasing a home based on looks is a lot like dating based solely on appearance. Sure, looks matter to a degree, but other factors like compatibility matter, as well.
When you walk inside a home for the first time, it’s easy to fall in love at first sight and focus on the looks. Sure, it’s impressive if a home has a new kitchen with granite countertops and stainless steel appliances, but what if the “bones” aren’t in good shape? 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 your own? Are you willing to spend the money on 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: Forgoing the Home Inspection
In hot real estate markets, some homebuyers are choosing to skip the home inspection. When you find your dream home and 10 other people are also interested, it’s tempting to forgo the home inspection and make a clean offer (an offer without any conditions). While a clean offer can help you come out ahead and get your dream home, you’re also leaving yourself open to all sorts of costly repairs you might 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 almost always money well spent. You’re most likely 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? (Referred as a pre-inspection.) 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: Shopping for the Mortgage with the Lowest Rate
When you go to the car dealership, do you buy the car that has the lowest sticker price? Probably 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 mortgages? 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 aren’t concerned about mortgage penalties, but here’s why you should be. 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 so crucial to choose a mortgage with a low 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.