5 Common Mistakes Made by First-Time Home Buyers And How to Avoid Them
Buying a home the first time can be intimidating. I know this firsthand. When I was 27 years old, I bought a home in Canada’s second priciest real estate market, Toronto. Buying a home involved a lot of moving parts. While I got a lot of things right, I made my fair share of mistakes along the way. I didn’t want others to repeat the same mistakes I made, so I wrote a book, Burn Your Mortgage, that walks you through the home-buying process while avoiding the many pitfalls along the way.
Here are 5 of the most common home-buying mistakes and how to avoid them.
Mistake #1: Buying “Too Much” Home
The easiest way to burn your mortgage years sooner is to not take on a big mortgage to begin with. This shouldn’t be a shocker. The smaller your mortgage, the less time it will take to pay off.
When you get pre-approved for a mortgage with a lender, you find out the maximum amount you can spend on a home. But it’s just that, a maximum amount. There’s nothing stopping you from spending less, far less. In fact, you’re probably better off spending less, otherwise, you could find yourself “house rich, cash poor,” with little money to save, let alone enjoy.
Let’s say your lender pre-approves you to spend up to $700,000 on a home. See what else is out there for $650,000. You may be pleasantly surprised to find a home that has most of the things on your wish list for only $650,000, leaving you with some financial wiggle room.
Mistake #2: Not Budgeting For Closing Costs
Every time you buy (and sell) a property there are costs involved. Those costs are referred to as closing costs. Many first-time homebuyers assume that closing costs don’t amount to much. (I assumed the same thing when I was buying my first home.) Unfortunately, that isn’t the case. Closings costs can add up to anywhere between 1.5% and 4% of the purchase price of your home. To put that into perspective, if you ended up buying that $650,000 home in the above example, your closing costs could add up to $26,000. Still think closing costs are a drop in the bucket?
And your lender won’t cover your closing costs. It’s your responsibility to budget for them ahead of time. Common closing costs include real estate lawyer fees, home inspection fees, and land transfer tax. By budgeting for your closing costs and holding back funds from your deposit and down payment, you can avoid the awkward situation of begging on your hands and knees for money from the in-laws at the eleventh hour.
Mistake #3: Choosing a Mortgage Based Solely On The Lowest Rate
When you go to the supermarket, do you buy bread, milk and eggs at the lowest price? No? Then why do so many of us do this when shopping for a mortgage? We look for the lowest mortgage rate. And while the lowest mortgage rate may be the best mortgage, there’s no guarantee. The mortgage with the lowest rate can help you save hundreds, but it can end up costing you thousands. That’s because there are other important factors to consider. What I like to call the “3 Mortgage P’s” – prepayment, penalties, and portability. It may be worth paying a slightly higher mortgage rate if your goal is to be mortgage-free sooner and it comes with more generous prepayment privileges.
Mistake #4: Not Checking Your Credit Beforehand
A mortgage is a lot of dough. Lenders won’t just take out their chequebook and write you a cheque to buy your dream home. They want to make sure you can afford to repay the funds.
Lenders look at your income, down payment, debt levels and last, but not least, perhaps the most important, your credit. That’s why it’s so important to maintain a good credit score – to help you get the mortgage with the most favourable terms.
You used to have to pay for your credit score, but luckily Borrowell now offers it for free. It’s a good idea to check your credit score at least six months in advance of shopping for a home. That way if you see any blemishes, you can take steps to improve your credit in time for your mortgage application.
Check your free credit score with Borrowell and get mortgage recommendations with the best mortgage rates in Canada, tailored just for you. It only takes 3 minutes!
Mistake #5: Love At First Sight
It’s easy to fall in love with a home at first sight and make a snap decision. It doesn’t help that bidding wars are common in a lot of real estate markets. Don’t forget that buying a home is most likely the single biggest financial transaction of your lifetime. Before sinking your life savings into a single asset, do your homework. Look beyond the cosmetic upgrades designed to “wow” you. Look at the “bones” of the home. Is the roof in good shape or in need of repair? Are the windows brand-new or drafty? Is the furnace newly-installed or on its last legs? By taking a closer looking at the home, you can avoid any surprise expenses that can drain your savings as a new homebuyer.
About The Author
Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach, and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post, Tangerine: Forward Thinking blog and MoneySense. Connect with Sean on LinkedIn, Twitter, Facebook and Instagram.