Becoming a homebuyer and applying for a mortgage can seem overwhelming, especially if it's your first time.
I have put together a list of the eight of the most common pitfalls, which a mortgage specialist/lender can help you avoid:
- Thinking you won't qualify for a mortgage. I see this quite frequently because I deal a lot with first time home buyers. Even if you think your credit history is less than perfect, talk to a mortgage specialist/lender. They are there to help you and to get you into your first home.
- Not knowing all the down payment choices. There are different options available depending on how much of a down payment you can afford. There is a conventional mortgage which is 20% down and low down payment mortgage(minimum 5% down). Low down payment mortgages require mortgage default insurance. The premium can either be paid up front or added to the amount you are borrowing. First time home buyers are eligible to use up to $25,000 in RRSP savings per person for a down payment on a home. The withdrawal is not taxable as long as you repay it within a 15 year period. To qualify, the RRSP funds you plan to use must have been in your RRSP for at least 90 days.
- Focusing too much on the interest rate, rather than the overall solution. While rates are a valid consideration, the different types of mortgages, their payment structures, terms and flexibility will have a much greater impact on the overall cost of homeownership. Fixed rate mortgages, variable rate mortgages and combined fixed and variable mortgages are offered as choices. Many experts believe variable rate mortgages offer the greatest potential for long-term savings on interest costs.
- Being unrealistic about how much you can afford to pay for your home. You may be under or over-estimating how much you can afford to pay for your home. There are many online mortgage calculators that you can enter your income and expenses and they will calculate the maximum mortgage payment amount you can afford each month.
- Not considering a mortgage pre-approval. Knowing the amount you will be approved for gives you the confidence to begin looking at homes within your price range. We, real estate agents, find this to be so much more helpful when trying to help you find the home you can afford. It is very hard to have clients who were not preapproved and find a house they think they can afford and they talk to their mortgage specialist, they find out they cannot afford that home. They are very disappointed. Get pre-approved and your pre-approved mortgage rate will be guaranteed for 120 days.
- Not choosing your own mortgage payment schedule. Customize your amortization period depending on how much you can afford. Paying off your mortgage sooner saves you interest costs, while a longer amortization period reduces your regular payment amount and gives you more room to manage your cash flow.
- Forgetting about closing costs. After finding the home of your dreams, picked out your mortgage options and you are ready to make an offer, make sure that you don't forget your closing costs. It's fairly safe to assume you'll need an additional 1.5% of the purchase price to cover closing costs including: home inspection, lawyer fees, land transfer tax(if first time home buyer, you may be exempt from this tax), property insurance, moving costs and looking at ongoing costs including heating, electricity, repairs and taxes.
- Not knowing your credit rating. A credit rating is a record of your credit history and current financial situation, which typically translates into a credit rating score. Lenders can use your credit rating to verify your repayment history. Checking your history is easy! Simply ask for a copy of your credit rating at either www.equifax.ca or www.tuc.ca.
If you can avoid any of these common mistakes, you will own your first home before you know it!