8 common mistakes most first time
homebuyers make and how to avoid them
Becoming a homebuyer and applying for a mortgage can seem overwhelming, especially if it’s your first time. With the help of an expert and dedicated mortgage specialists, it can be easy. They’ll meet with you any time to guide you through the process and help you find the best mortgage for your specific needs.
To help you feel more confident and prepared for becoming a first-time homeowner, we’ve put together a list of eight of the most common pitfalls, which a mortgage specialists can help you avoid.
Not knowing your credit rating
A credit rating is a record of your credit history and current financial situation, which typically translates into a credit rating score. Lenders can use your credit rating to verify your repayment history. A good credit rating can improve your ability to get loans and mortgages. If your credit rating needs improvement to help you qualify for a mortgage, you can improve your credit rating by always making at least the minimum payments on your credit cards, loans or utility bills on time. Checking your history is easy! Simply ask for a copy of your credit rating at either Equifax or TransUnion
Being unrealistic about how much you can afford to pay for your home
You may be under, or over-estimating how much you can afford to pay for your home.
You can use an online mortgage calculator to quickly figure out monthly payments for different mortgage amounts and rates. You may find out you can comfortably afford more than you originally thought.
For a more personal touch, contact a mortgage specialist. They can quickly help you determine how much you can afford and answer any questions you might have.
Not considering a mortgage pre-approval
Knowing the amount you will be approved for gives you the confidence to begin looking at homes within your price range. We Realtors will be better equipped to assist you because we’ll be shopping in your price range. You can easily make an offer to purchase as soon as you find the right home.
Thinking you won’t qualify for a mortgage
Dreaming of owning your own home and not sure if you qualify for a mortgage? Even if your credit history is less than perfect, we can help you find a solution. Not knowing all the down payment choices You’ll be glad to know that there are different options available depending on how much of a down payment you can afford:
- Conventional mortgage (20% down payment)
- High Ratio mortgage (less than 20% down)
Low down payment mortgages require mortgage default insurance. The premium can either be paid up front or added to the amount you borrow.
Under the federal government’s Home Buyer’s Plan, first-time homebuyers are eligible to use up to $25,000 in RRSP savings per person ($40,000 for couples) for a down payment on a home. The withdrawal is not taxable as long as you repay it within a 15-year period. To qualify, the RRSP funds you plan to use must have been in your RRSP for at least 90 days.
Focusing too much on the interest rate, rather than the overall solution
All too often, first-time homebuyers give more thought to interest rates than the mortgage solution itself. While rates are a valid consideration, the different types of mortgages, their payment structures, terms and flexibility will have a much greater bearing on the overall cost of homeownership.
Fixed rate mortgage
Fixed rate mortgages offer the security of locking in your interest rate for the term of your mortgage, and your payment amount stays the same, providing ease of budgeting. The main advantage is that the interest rate stays the same during the term of the mortgage and that you know exactly how much of your payment is applied to principal and interest.
Variable rate mortgage
With a variable rate mortgage, your payments remain the same, regardless of fluctuating interest rates. When rates go down, more of your payment goes to pay the principal and less to interest, enabling you to pay off your mortgage sooner. When rates go up, the reverse happens: less of your payment goes toward the principal and more to interest, extending the amortization period. Many experts believe variable rate mortgages offer the greatest potential for long-term savings on interest costs.
Combined fixed and variable rate mortgage
You can enjoy the advantages of both variable and fixed rates by diversifying your mortgage. That means the variable portion allows you to take advantage of potential long-term savings, while the fixed rate portion protects you if rates rise. Your mortgage specialist can help you decide which mortgage solution works for you, based not only on your budget but also on your future plans.
Not choosing your own mortgage payments schedule
Customize your amortization period depending on how much you can afford. Paying off your mortgage sooner saves you interest costs, while a longer amortization period (up to 35 years) reduces your regular payment amount and gives you more room to manage your cash flow. Because extended amortization means increased interest costs and paying down a mortgage more slowly, this option isn’t for everyone. A 25-year amortization period should be the starting point for your consideration as stretching the amortization to 35 years can increase your total interest costs by 50% over the life of the mortgage. If you decide a longer amortization is appropriate, consider a strategy to reduce amortization over the life of the mortgage. Money-saving options, such as doubling a payment, accelerated payment, anniversary lump-sum payment and/or annual increase(s) in payment amount, can get you back on track to a 25-year—or even shorter—amortization period. Regardless of the mortgage option you choose, buying and owning a home is likely to be one of the biggest financial investments of your life.
Forgetting about closing costs
By this time, you’ve selected a house, picked your mortgage options and are getting ready to finalize everything and make an offer. This means getting down to certain details and their associated costs. It helps to know what these are up front so you can minimize any last minute complications. When calculating closing costs, it’s fairly safe to assume you’ll need an additional 1.5% of the purchase price to cover such things
- Professional home inspection:
Always make an offer conditional upon a home inspection. As long as your offer is conditional upon the home inspection, you may be able to have the purchase price reduced to offset the cost of needed repairs or cancel the agreement, should the repairs needed be too severe. You should also inspect the home before moving in to make sure its condition has not changed. A newly built home is usually covered by a builder warranty program.
- Lawyer or notary fees:
Make sure you work with an experienced real estate lawyer/notary so that all legal aspects of your house purchase are properly completed.
- Land transfer tax:
Most provinces levy a one-time tax, which is based on a percentage of the purchase price.
- Property tax/utility bill adjustments:
The purchase price of a resale home is always payable subject to the usual adjustments at closing. This means that any amount that the seller has already prepaid will be adjusted so you pay the excess amount back to the seller, and vice versa. The most common adjustments occur on property taxes and utility bills that have been paid ahead of time.
- Property insurance:
Your home is probably the biggest investment you will ever make in your life. Property insurance is all about protecting the things you value: your home, your personal belongings and even your financial future. When choosing an insurance company, make sure they offer a range of choices allowing you to personalize your insurance to suit your needs.
- Moving costs:
Budget for a professional mover, decorating costs and fees for setting up your cable, telephone and other utilities.
- Ongoing costs:
Don’t forget to budget for the cost of maintaining a home, such as heating, electricity, water, repairs and taxes. A good suggestion is to budget at least 1% of the home’s value for yearly maintenance expenses.
Owning your own home is a milestone as well as an exciting experience! How often do you get to live in and enjoy your investments? We, your Realtors are always, and your mortgage specialist as well, are available to guide you through the process.