For most people, a house is the largest investment they ever make. That being said, it’s necessary to do some research and understand what home-ownership is all about before jumping into anything.
When considering purchasing your first home, getting pre-approved for a mortgage is a great way to start the process and get an idea of how much you qualify to borrow. As a rule, most lenders permit your mortgage, property taxes, condo fees (if applicable) and heat to be no more than 32% of your gross monthly income. And your total debt (all of the above plus credit card payments, loan payments, child support, alimony, etc.) to be no more than 40% of your gross monthly income.
It is IMPERATIVE that you obtain a home inspection on a home you are putting an offer on. Existing problems can be hidden behind nice looking walls. Without an inspection you risk having to spend thousands of dollars on existing issues perhaps just months into getting into your new home.
Some other common mistakes first-time buyers make are:
1. Not Having Good Credit or Enough Credit History
Your credit bureau is a record of your credit history and current financial situation. A good credit score can improve your ability to obtain a loan. If your score is low, it will be more difficult to obtain financing. A good credit score is obtained by having at least two trade lines (credit cards, loan payments etc.) and paying at least the minimum payment each month on or before the due date. Something many people don’t know is that using more than 75% of the credit available to you can also hurt your score. (For example, if your credit card has a limit of $1000, you should not spend more than $750 on it)
2. Not Budgeting for the Costs of Home Ownership
Traditionally, you will need to save 5% of the purchase price of your home, plus another 1.5% for closing costs. It is important to remember to save money as well for home insurance, regular upkeep of your home, and an emergency fund for repairs. Also, you may want to do some renovations to your new home so it’s necessary to save for that as well.
3. Not Researching Down Payment Options
Lenders typically require CMHC mortgage loan insurance if you make a down payment of less than 20%, and premiums for that insurance can be as high as 3.25% of the value of the loan. Under the Home Buyers’ Plan, first-time buyers can use up to $25,000 in RRSP savings ($50,000 for a couple) for a down payment. A higher down payment will save thousands of dollars in interest over the life of your mortgage.
4. Focusing too much on Interest Rates
First-time home buyers rush in to the market when interest rates are low. While rates are important, other things have a greater bearing on the overall cost of home ownership, including the cost of the house, the type of mortgage, portability options, pre-payment privileges, the amortization period, and payment schedule options.
Sometimes the lowest rate mortgage can actually end up costing you thousands of dollars or a ton of headache should you decide to move or get out of it a few years down the road.