First Time Buyer Mistakes
How to avoid them
Applying for a mortgage and becoming a home buyer can seem overwhelming especially if it’s your first home. With the help of a mortgage specialist, it can be easy. They will meet with you anytime and guide you through the process and help you find the best mortgage for your specific needs.
Here you will find the most common pitfalls and how to deal with them, so that you can feel confident and prepared to take the steps towards home ownership.
- Not knowing your credit rating.
A credit rating is a record of your credit history and current financial situation which is typically translated into a credit score. Lenders use your credit rating to verify your repayment history. A good credit rating could improve your ability to get loans like mortgages. If your credit rating needs improvement to help you qualify for loans, you can improve your score by always making at least the minimum payments on your credit cards, loans or utility bills in a timely fashion.
- Being unrealistic about how much you can afford to pay for your home.
You may be under or over-estimating how much you can pay for your home. Online mortgage calculators are available. Click on the “How much can I afford” calculator in the tools section, enter your income and expense information and the calculator will tell you the maximum mortgage amount you can afford monthly. You can also use this calculator to figure out mortgage payments with different amounts and rates.
- Not considering a mortgage pre-approval.
Knowing the amount you will be approved for gives you the confidence to begin looking for homes within your price range. As long as you earn sufficient income and have no large debts or credit issues, you should be pre-approved for a mortgage. A pre-approved mortgage rate is guaranteed for 90 days* (or lower if rates drop) so you can continue shopping and do not need to immediately commit.
- Assuming you will not qualify for a mortgage.
Have you ever been declined for a mortgage for any reason, even bankruptcy, and still dream of owning your own home? If you do not qualify for a conventional mortgage your mortgage specialist may still be able to help you get the home of your dreams through an alternative mortgage solution. Although the alternative mortgage may cost a little more initially, once your credit situation has improved, you are able to lower your mortgage cost in the future.
- 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 (25% down-payment)
High-Ratio Mortgage (minimum 5% down)
No down-payment mortgage (must have a minimum of 1.5% value of the home set aside for closing costs)
As high-ratio and no down-payment mortgages have lower down-payments, they require a higher mortgage loan insurance premium. This premium is added to the amount you borrow. As a first time homebuyer, you can also use money saved in your RRSP towards a down-payment with a maximum of $ 20,000 per person.
- Too focused on interest rate rather than overall solution.
The mortgage specialist is there to help you decide which mortgage solution works best for you and fits not only your budget but within your future plans.
Fixed rate mortgage: offers you the security of locking in the interest rate for the length of the mortgage term (anywhere from 6 months to 10 years) the interest rate for a fixed mortgage tends to be somewhat higher than for a variable rate mortgage.
Variable rate mortgage: your interest rate will fluctuate according to the lender’s prime rate. However, over time you could have greater savings on long term interest costs. Worried about how much you’ll be paying regularly? Your regular monthly payments remain the same on a variable rate mortgage*, only the portion of the payment allocated to principal and interest will fluctuate with the prime rate.
Combined Fixed & Variable: If you want to benefit from the best of both worlds, ( the security of a fixed rate with the potential long term savings from a variable rate) you can consider RBC’s Homeline Plan.* This option requires 25% equity in your home.
- Not choosing your own mortgage payments schedule.
Customize your amortization period depending on how much you can afford. Paying off your mortgage faster saves on interest costs, while a longer amortization period such as 35 or 40 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 is not for everyone. A 25 year amortization period should be the starting point as stretching the mortgage amortization to 35 or 40 years can increase your total interest costs by 50% over the life of the mortgage. If you decided a longer amortization is appropriate, consider a strategy to reduce the amortization over the life of the mortgage, accelerated payments, bi-weekly payments, 10% anniversary payment and annual 10% increase 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 decisions of your life. Creditor insurance can help protect that investment from life’s uncertainties and help give you the confidence that comes with knowing your investment is well protected.
Life and disability insurance can pay your outstanding mortgage balance up to $500,000 in the event of death, or can make your regular monthly mortgage payment – up to $3,000 per month up to 24 months – if you become disabled.
- Forgetting about closing costs and other non-banking details.
By this time you have selected a house, picked your mortgage options and are getting down to some picky details. It helps to know what these are so you can minimize any last minute complications. Some additional budget items may be:
Professional Home Inspection: Always make an offer conditional upon a home inspection. As long as your offer is conditional upon the home inspection you can have the purchase price reduced to offset the cost of needed repairs or cancel the agreement. You should also inspect the home before moving in to make sure the condition has not changed. Newly built homes are covered by the TARION builder warranty program.
Lawyer or notary fees: make sure that you work with an experienced lawyer /notary so that all legal aspects of your house purchase are properly completed.
Property Taxes: Look for the previous year’s payments in the property listing given to you by your real estate agent. Although property taxes will fluctuate, you’ll have a general idea of how mush you should expect to pay.
Property Insurance: 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 that they offer a wide range of choices allowing you to personalize your insurance to suit your needs.
Property Value: Know that when you buy property, there is a possibility that the property value will fluctuate. Typically over time property values increase and buying a home is generally considered to be a good investment.
Moving Costs: Budget for a professional mover, decorating costs and fees for setting up your cable, internet and telephone and other utilities.
Ongoing Costs: Don’t forget to budget for the cost of maintaining a home, such as heating electricity and water, repairs and taxes. A good suggestion is to budget at least 1% of the homes value for yearly maintenance expenses.
Owning your own home is like living in your investment. If you have any questions please contact Lindsay Doke, Royal Bank Trusted Mortgage Adviser.