Buying your first home is an exciting experience, but there is also quite a bit of work involved and more than a few potential pitfalls. So, before you let your enthusiasm get too far ahead of you, take a look at these mistakes that first-time buyers commonly make and tips you can use to avoid them.
» JUST GETTING STARTED? Check out our first-time home buyer guide
Wanting your own home and being able to afford your own home are two very different things. So, how do you know if you’re actually ready to buy your first home? And how much you can afford to pay for it? One way to answer these questions is to examine your finances against the requirements mortgage lenders use to determine if you qualify. These include:
Keep in mind that a lender’s requirements don’t tell the full story of what you can afford, however. When determining an affordable monthly mortgage payment — and total loan amount — you’ll want to factor things like closing costs, non-debt bills, maintenance costs, and future plans, like starting a family.
» MORE: How much mortgage can I afford?
Making a down payment is an essential part of the home buying process. In Canada, the minimum down payment required is 5%, and it’s higher for homes that cost more than $500,000. But there are pros and cons to putting down down more. If you have the time to save up 20%, for instance, you can avoid the cost of mortgage default insurance.
Even if you don’t hit that 20% down payment mark, saving more for a down payment means you may be able to qualify for a larger mortgage amount. This can be helpful in Canadian real estate markets where prices are especially high.
» MORE: How to save for a down payment
The better your credit score, the better the interest rates you will be offered on a mortgage and the more likely you are to be approved. Apply with a score that’s too low, and you could be rejected outright. So contact the Canadian credit bureaus, Equifax and TransUnion to learn your score before applying for a mortgage. The bureaus can also supply copies of your credit report, which you should review to make sure it’s free of errors that could be impacting your score.
If your credit score is low, but there are no mistakes on your report, there are things you can do to build it up before shopping for a mortgage. A few ways to strengthen your credit score include:
Mortgage lenders want to be sure you’ll be able to make your mortgage payments, even if interest rates increase in the future. To determine this, they use what’s called a mortgage stress test. This means they apply higher-than-market rates when determining how much you qualify to borrow. The qualifying rate for the stress test increased in June 2021 to 5.25%, or the rate offered by your lender plus 2% (whichever is higher). You can stress test your own finances before applying for a mortgage, to get a better idea of where you stand.
Though you may have a preferred bank or know a mortgage broker that’s been recommended by a friend, it doesn’t mean they’re the best choice for your situation. Take the time to do your research, get quotes from multiple lenders and negotiate the terms you want. Also be sure to consider other factors, such as the prepayment penalties the lender may impose if you want to refinance before your term is up.
It’s also a good idea to get pre-approved for a mortgage before you shop for a home. This will help you keep your budget in mind when house-hunting. However, note that being pre-approved does not guarantee final approval.
The government of Canada has three assistance programs in place to help first-time home buyers. If you qualify, these programs can reduce the financial challenges of buying your first home.
Your down payment isn’t the only cash you’ll have to bring to the table when buying your first home. Closing costs can be as much as 4% of the total cost of your new home. Closing costs cover expenses such as home inspection, property appraisal, legal fees and more. Some closing costs are optional but some are mandatory, so when you’re deciding what you can afford, make sure you budget some money to cover this fee.
Hannah Logan is a writer and blogger who specializes in personal finance and travel. You can follow her personal travel blog EatSleepBreatheTravel.com or find her on Instagram @hannahlogan21.