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Before you get caught up in the excitement of buying your first home, ensure you don't make these seven mistakes.
When you finally save up for a down payment on your first home, it's easy to jump right into the real estate market to check out your options. But before you place an offer or get caught up in a bidding war, make sure you're not guilty of these:
1. Not understanding how much you can really afford
There’s more to the cost of a house than simply the listing price. From interest and closing costs to property tax, maintenance and utilities, the cost of your home will add up quickly to include much more than your mortgage payments. Be sure to calculate all of your costs and take them into account when deciding whether or not you can afford a particular house. It's typically recommended that you keep your housing costs at 30% or less of your annual income.
2. Not getting approval in advance for a mortgage
Before you start looking at houses, it’s a good idea to get pre-approved for a mortgage. Not only will this help inform your decision-making by helping you to know exactly how big a loan the bank is prepared to give you, but can also give you a leg up if you’re in a bidding war. If the seller knows that you’re pre-approved for your mortgage, it shows that you’re a serious buyer and will put you in good stead than a buyer who is not pre-approved.
3. Draining your savings to pay for the down payment
The larger your down payment, the more money you’ll save on interest payments. But does it make sense to drain your savings to get that large down payment? There may be times when it does, but in general, it’s not recommended. If you empty your savings, you won’t have anything to dip into in the event of an emergency. So save steadily for your down payment and always make sure you still have a reserve fund set aside for unexpected expenses. Renting might just be the smarter choice at this time.
4. Not interviewing a variety of lenders
As you begin the process of getting pre-approved for a mortgage, don’t go with the first bank who approves you. Fees and rates will vary from lender to lender, as will the services and products they provide. So, meet with a variety of financial institutions to find the lender that’s right for you.
5. Not understanding Canada’s first-time homebuyer programs
The Canadian government offers something called the RRSP Home Buyer’s Plan (HBP), which allows qualifying first-time home buyers to withdraw, tax-free, a maximum of $25,000 from their RRSP to put towards a down payment. While this program may be helpful to some, it’s important to understand the advantages and disadvantages. With the rising cost of housing in Canada, the $25,000 withdrawal may not be enticing enough when you consider that you will need to put all of that money back into your RRSPs to avoid paying a penalty. And while you have 15 years to pay the money back, if you default on the payment, you’ll have to pay tax on the outstanding amount. Consult with a financial professional to help you decide whether this program makes sense for you.
6. Failing to get a home inspection
The housing market can be competitive so it’s tempting for first-time home buyers to try to make their offer as attractive as possible. Waiving a home inspection may seem like a way to show trust to entice the seller, but it’s not a good idea. You don’t want to make a purchase as large as a house, move in and then find that essential utilities aren’t working or that the home has engineering or structural damage. The cost of repairs could be hefty. You might save a few hundred dollars by not conducting a thorough home inspection but problems down the road could cost you thousands. You’ll kick yourself for not getting the home inspection done in the first place.
7. Not considering resale value
When you’re buying a house, selling that same house is probably the last thing on your mind — but it should be. How do you know if a home will have good resale value? While there are no guarantees, consider how desirable the location is, whether there are good schools nearby and whether the layout of the home is appealing. While you may appreciate unique design features or quirky neighbourhoods, they may not appeal to everyone, narrowing the pool of potential buyers down the road.