Homeowner

Buying Your First Home? Great, Here’s What NOT To Do

Buying your first home can be very exciting, but it can also be stressful, especially if it is your first time making such a significant purchase. The most important thing to keep in mind is to do your own research and due diligence. Don’t rush to make a decision just because you’re afraid of missing out on a “great deal” and remember that you’re the one in the driver’s seat—don’t leave the decision-making up to anyone else. This is a decision that will impact your finances for years to come, so make sure you’re doing what makes the most sense for you and your future goals.

So without further ado, here are the top newbie mistakes to avoid when purchasing your first home:

1) No Pre-Planning

You need to get your finances in order before you can take any kind of real first step towards buying your first home. That means taking a look at your credit score and credit rating, your budget, your monthly expenses, and of course, saving up for that down payment! Ideally, you will want to save about 20 percent of the cost of the home for your down payment—anything less and you’ll be paying more in interest, which will cost you a lot more in the long run—but you also have to remember that there will also be closing costs too, typically about 2-3 percent of the loan amount. These usually catch first-time buyers off guard, leaving them scrambling to cover that extra $4,000-10,000 to close.

2) Buying too much home

Just because you can get a $500,000 mortgage doesn’t mean you have to take it. When you go to a mortgage lender, whether it’s your bank or another third-party lender, they will typically tell you the absolute maximum you can get, but that doesn’t mean that’s automatically your budget. Avoid being “house poor” by taking on a huge mortgage; otherwise, you’ll struggle to cover your everyday expenses and save for future goals—and who wants that? In general, a good rule of thumb is your mortgage payment shouldn’t exceed 30 percent of your monthly income—in fact, your total debt-to-income ratio shouldn’t exceed 40 percent of your income overall.

3) No Comparison Shopping

If you’re serious about buying, then know at the onset that it’s going to take time and research. There are no short cuts to buying a good home and making a purchasing decision that you won’t regret. You don’t need to go with the first realtor you meet, or the first home you see and definitely not the first mortgage lender who makes you an offer. Remember, you can look beyond your bank when it comes to your mortgage, and shopping around for the best rates can make a world of difference, for you, your finances, and your future.

4) Taking out a loan or new credit card before getting a mortgage

By now we should all know the power of our credit score but many (many) of us still don’t know the impact that some of our “innocent” decisions have on it. For example, did you know that any time you sign up for additional credit—whether you’re at the bank, mall or shopping at a store—that counts as a hard inquiry and a hit on your credit? I once had a client come in who had absolutely no clue why her credit score was so low. When I pulled her credit report (a soft inquiry by the way, which doesn’t affect your credit score) there were probably over thirty inquiries from lenders—all credit card applications she had filled out while shopping at stores. She figured she might as well try and see if she should get some extra credit. What she didn’t know was all the damage she was causing to her credit and that every time she filled out form she was essentially decreasing her likelihood of getting credit or qualifying for a mortgage. So do yourself a favour: If you’re seriously considering buying a home and getting a mortgage, work on building your credit the right way.

5) Consolidating debt into your mortgage

I know, it sounds tempting to consolidate all of your debt into your mortgage, but be careful. While your mortgage rate might be lower than the interest being charged on your consumer debt (i.e., credit cards, lines of credit, etc.), consolidating your consumer debt into your mortgage can potentially take you a lot longer to pay it all off, which could mean paying more money in interest in the long run. Paying off your debt sooner rather than later is never a bad thing.

As a first-time homebuyer, it’s easy to get overwhelmed and simply rely on the expertise and knowledge of professionals like realtors, mortgage lenders and financial planners, leaving all the heavy-lifting and decision-making up to them. But remember: At the end of the day this is your decision, and when everything is said and done (and signed!), you’re the one who’s going to have to live with the consequences. Professional expertise should never replace your own judgement—it should only help it.  So do your research (there’s no such thing as too much), if something isn’t clear ask a pro, and get a clear idea on exactly how much you can safely afford. Happy home hunting!

About Anna Guglielmi

Anna is a certified credit counsellor and financial coach for Credit Canada Debt Solutions – Canada’s first and longest-standing non-profit credit and debt counselling agency.  Anna works with clients one-on-one to help them achieve their financial goals, eliminate debt, improve their credit, and remove the stress that comes with debt by providing the best possible unbiased advice and solutions.