In the market for a new home in the next year or two? Make sure you avoid these common homebuyer mistakes:
Not getting a pre-approval. The very first thing you should do before doing much more than glancing through the real estate section of the newspaper or online is to go to your mortgage broker or favourite lender and get preapproved for a mortgage. For one thing, this tells you how much you can afford, so you don’t risk finding a house you fall in love with but can’t actually buy. For another, it allows your mortgage professional to review your credit score and credit report. If there are any problems with your credit, errors on the credit report (which happens more often than you might think), or your credit score is too low, you can then work together to develop a credit improvement plan. This can take as long as two years, so the earlier you start, the better. Your reward will be qualifying for the best possible interest rate on your mortgage and, therefore, saving money.
Not knowing where your down payment is coming from. You will need anywhere from 5% to 20% of your home’s purchase price as a down payment. Money in an RRSP (up to $25,000, for first time home buyers), money in bank accounts or brokerage accounts, or a gift from a family member are possible sources. If you are putting down less than 20%, it’s called a “High Ratio” mortgage. All this means is that the mortgage must be insured either through CMHC or Genworth, to protect your lender. There are a few lenders that offer what they call a cash back mortgage, where you can get money on your closing date to help with closing costs, your down payment, or another purpose. The bottom line, however, is that you will have to prove that you have a down payment.
Not budgeting for closing costs. Don’t get caught forgetting about closing costs. You will need to demonstrate that you have at least 1.5% - 3% of the purchase price to cover costs including lawyer fees, land transfer tax (including Toronto’s MLTT), home inspection, title insurance, interest adjustments, and other charges. See my blog post about closing costs for more details.
Maxxing out on your home purchase. We’ve all been there. You’re out looking at homes, and you go see “the one” – the house with that perfect kitchen or the perfect yard for entertaining. The catch is that it’s just a tad above your top price. But if you tighten your belts, you could just about manage it, right? Well, before you rush in, make sure you spend some time looking at something less exciting: the numbers. If you have a pre-approval, you should know by now how much you qualify for. Work through how each month’s budget would look like it you do max out. Do you have any money left over for things like home maintenance? Unexpected expenses such as a new roof or new car? Fun things like travel? And what happens if interest rates go up, or you or your partner don't get that expected bonus – will you still be able to afford the payments?
Hiding information about your financial situation from your advisors. Often people will not disclose negative financial information because they are concerned that they will “look bad”, don’t feel it’s relevant, or don’t think it will come to light. Unfortunately, surprises during the home financing process are usually not happy surprises! It is better to be forthright about your situation. There are very few circumstances we haven’t seen before, so we usually have a solution!
Changing something about your financial picture before closing on your home purchase. Remember that you have been approved for your mortgage based on a certain set of financial circumstances – income amount, employer / self-employment information, current debt load. Do not run out and sign for a new car lease, or quit your job to start a business, or anything else that impacts the set of numbers you provided when you applied for your mortgage!
Feel free to call me to discuss your options. In the meantime, I wish you smooth and surprise-free home buying.
Photo credit: [c] ComputerHotline for openphoto.net
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