First-Time Buyers: 10 Mistakes to Avoid When Buying Your First Home
Buying your first home can feel like a dream come true. All that saving, house hunting, and negotiating finally pays off, and you can at last relax in the comfort of your property. However, while buying your first home can be an exciting and goal-fulfilling journey, it can also be bumpy and stressful.
Over my years of property investing and helping clients with their first-time home-buying experience, I’ve grown accustomed to spotting pitfalls in hindsight. Unfortunately, the home buying process is seldom smooth, and clients are often unaware of little mistakes which may create long-term problems or incur costs.
For all my first-time buyers who want the best out of their experience, here are ten things to avoid throughout your purchasing journey.
1. Bypassing Your Pre-Approval
Full disclosure: you can buy a property that you have no business buying. The biggest mistake I’ve seen first-time buyers make is buying outside of their purchasing power without a pre-approval.
A pre-approval highlights your purchasing power based on the bank’s analysis of your financial portfolio. For example, when you apply for a mortgage pre-approval, your lender accounts for your financial capabilities by analyzing your income and job history, credit report, and liabilities.
While you may have saved around $50,000 for a down payment, and your income provides for $2000 worth of monthly mortgage payments, the bank may think differently based on other factors. In some cases, buyers put in offers for homes they think they can afford, and upon moving through the approval process, the bank asserts that they technically cannot afford that property.
Getting pre-approved gives you your official mortgage price, showing sellers that you are a serious buyer who knows their limits. In a city like Toronto, a pre-approval can give you a leg-up in bidding wars, making your buying process more efficient.
2. Staging Bias
POV: You walk into your first property showing, and the place looks fresh out of a Martha Stewart home catalogue. I’m talking fresh flowers on the counter, tons of open space, quality brand-new furniture, and expensive art on the walls. It smells like fresh baked cookies, and the lawn is cut like a golf course on a Saturday morning. Not to mention, the bathrooms are upgraded, and the basement is fully finished… what’s not to love?
POV Part 2: You decide this is the house for you, and cancel all other showings. You place an offer and begin the closing process. A week later, you return to the house, and the fresh flowers are gone along with the brand-new furniture, the expensive art, the smell of baked goods, and the lawn is grown out. The bathroom is (thankfully) still upgraded, and the basement is the same, but suddenly, the space doesn’t seem as great as it was at that first showing.
Falling for home staging is common. A place can seem next to perfect if the right company stages it. These days, sellers remove most of their belongings for staging to create a more aesthetically appealing presentation. In reality, your home will look nothing like it did as a staged home – there will be clutter, extra furniture, and maybe kids or animals running around and creating messes. It’s up to you and your purchasing partner to examine each home without staging bias to ensure that you are buying a home for what it is rather than what it looks like staged.
3. Ignoring Closing Costs
This is a big one - it’s highly common for buyers to ignore the reality of closing costs as they’re primarily focused on their down payment. Many first-time buyers don’t realize that closing costs can amount to thousands of dollars, making them a prime site for budgeting.
Closing costs include your land transfer tax, mortgage set-up costs, including an appraisal and possibly mortgage insurance, utility and property tax costs, legal fees, and title insurance. Moreover, don’t forget moving costs, home maintenance costs, and money aside for any necessary upgrades.
Consider these expenses before you begin your home search to ensure you have enough money saved for your down payment and all additional fees.
4. Risky Pre-Purchase Behaviour
Financing a new car, taking out a loan for a business venture, or racking up your credit card to buy new furniture for your future home are great ways to rescind your purchasing approval.
If you are serious about buying property, your bank expects you to prove so by avoiding financially risky behaviours that create liabilities. Changing your employment status, purchasing a new car, or spending too much on credit can indicate riskiness and affect your ability to afford a mortgage on paper. Lenders like to see consistency and stability in your financial history, especially in the months and years leading up to your purchase. Any risky financial actions within the months leading up to your purchase can create issues that may prevent you from buying.
Maintain trust with your lender by avoiding job switches and any high costs or debts on your line of credit.
5. Saving the Bare Minimum
Saving up for your first home can seem like a long and tedious process, which may encourage you to act on the market as soon as you have enough saved for a down payment and closing costs.
I always motivate my clients to get into the market and invest as soon as they can, but what many people view as “I can” tends to fall short as these clients end up spending their entire savings on their down payment and closing costs, leaving them with very little to move forward.
DO NOT spend your entire savings on your down payment. Budgeting for closing costs is a good start but having a few extra thousand dollars is the best way to ensure that you have enough to settle in with maintenance costs and monthly payments. The last thing you want is to rush into a purchase that runs you dry and leaves you struggling to make ends meet.
6. Assuming the Worst for Your Down Payment
In Toronto, we tend to assume that all down payments must be 20% of the purchase price. While there are benefits to putting 20% down, such a large down payment is only necessary for homes over $1 million. In many cases, buyers cannot afford to put 20% down, much less 20% of a million. Thankfully, the payment structures for down payments vary based on the total purchase price. Homes sold under $500,000 only require 5% of the purchase price, while homes between $500,001 - $999,999 required 5% of the first $500,000 plus 10% of the remaining portion between $500,001 - $999,999.
In cases where your down payment is less than 20% of the total mortgage, you will be required to purchase mortgage default insurance. Buyers with mortgage default insurance may receive lower interest rates since insurance creates more trust with the lender, but it will also incur an extra charge that may be avoided by paying 20% down.
Overall, do not stress yourself with the toll of saving $200,000 for a down payment if you intend on buying a home below $1 million. Instead, assess the market for property types that match your budget and plan for an appropriate down payment.
7. Refusing Home Inspection
Home inspections protect buyers from purchasing homes that may have severe issues in their structures or systems. A home inspection can uncover problems that are otherwise invisible to the eye, saving you thousands of dollars in repairs or fixes. Unfortunately, many buyers choose to forego home inspections as they incur an extra cost that many deem “unnecessary”. In the heat of a seller’s market over the past few years, many Torontonians avoided home inspections as they may have stood in the way of winning bidding wars. In a buyers or balanced market, home inspections can provide buyers with the foundation to negotiate lower purchase prices or repair costs.
A home inspection can be the differing factor between buying a home that will last versus purchasing a home that will cost you in the future. Do not avoid a home inspection to save a couple of hundred dollars – it will go a long way and provide you with peace of mind about your investment.
8. Omitting First-Time Buyer Programs
There are numerous first-time buyer programs available for Ontarians and Canadians. These programs are federally and provincially funded to lighten the load of investing in the property as a first-timer.
These programs include:
1. Home Buyers Plan
Withdraw up to $35,000 from your retirement savings plan to put towards a down payment
Couples can withdraw up to $70,000
Repayable annually over 15 years
2. First-Time Home Buyers Incentive
A second interest-free loan covering 5% or 10% of the purchase price of your property
Repayable when you sell or after 25 years
Program was extended until March 31, 2025
3. Land Transfer Tax Rebate
First-time home buyers eligible for up to $4000 on the first $368,000 of their qualifying home
First-time home buyers in Toronto may be eligible for an additional rebate of $4,475
4. Home Buyers Tax Credit
For Canadians purchasing after four or more years of not owning a home
Claim up to $5000 on taxes for a rebate of $750
As of January 1, 2022: claim up to $10,000 for a rebate of up to $1,500
To learn more about the first-time home buyers’ experience and Government programs, check out this blog post on First Time Home Buyers in Toronto.
9. Rushing or Waiting
When you make an offer on a home, you are committing to follow through with the deal if the seller accepts it. This means that you must be 100% on board with that purchase and ready to proceed with closing if the offer is accepted. With this said, avoid rushing into an offer on a home you're unsure about just because you're eager to buy a property in general. Instead, take your time with the decision and review the bounds of your real estate contract before proceeding with an offer.
Now, you don’t want to take too long when deciding on a property. Even in slower markets, waiting days or even hours can result in an accepted offer from another buyer and the continuation of your home search. So if you see a property you like with 100% certainty, act as soon as possible to avoid losing out on a good deal.
10. Talking to the wrong people
Lastly, one of the most common mistakes I see first-time buyers make is talking to the wrong people about real estate. On the topic of property investing, many people speak out of fear. They attempt to explain the market from a perspective that constantly assumes the worst and fundamentally builds on fear of buying. They’ll claim that the market is set to crash, that buyers are at an all-time disadvantage, and that purchasing property will only create more problems for you.
The truth is no one can time the market. Real estate trends are, to a certain point, unpredictable, and the market constantly goes up and down. The best way to proceed with buying at the best time and with the most confidence is to speak with a real estate agent or mortgage agent who can provide you with an industry-relevant perspective.
Remember that working with a real estate agent can ease the burden of multiple steps throughout your buying process but working with the wrong agent can do you worse than good. Going through the motions to find a dedicated agent who will educate you and maintain a good line of communication can result in a far smoother experience than working with the first agent you find.
Interested in beginning your first home-buying journey? Ready to connect with an agent who will ensure you avoid every pitfall along the way + meet your goals and needs? Message me on Instagram or click the link below to schedule a call! Let’s get started together.
