There’s no greater teacher than experience itself. With a wealth of information online about buying your first home, it’s still easy to fall into the biggest mistakes that first-time homebuyers make. Learn these common missteps to successfully avoid them, and dive into your search with confidence.
The top 5 financial mistakes made by new homebuyers
Even the most well-prepared buyers can fall prey to popular mistakes. Whether it’s failing to see the big picture, missing surprise costs, or letting emotional buying cloud their judgment, it’s important to stay focused on the facts. Here are some popular mistakes to avoid.
1. Failing to make a detailed financial plan
In the excitement of home ownership, it’s tempting for new homebuyers to skip steps in building a clear financial picture. Get financially prepared for home ownership by meeting with a financial advisor and building a plan that matches your resources, needs, expenses, and limitations. If you find a house you love before you’ve adequately prepared, you might be tempted to make an emotional decision and end up with mortgage payments that stretch you thin. Financial preparedness lets you sort out whether the home you want, the money you have access to, and the lifestyle you live can harmoniously exist. Steps like pre-qualification and pre-approval also improve your chances of succeeding in a competitive market.
How can I plan financially for home ownership?
You can use online mortgage-planning tools, market reports, financial planners, credit checks, and self-planning techniques to build a budget. Tools like this help form a clear picture of how much house you can afford. But before you get deep into financial details, make a list of your must-haves for a home: including bedrooms, amenities, locations, and necessary features. Include a list of extra things that aren’t imperative but might be extras you’re hoping for; these may include features like an extra guest bedroom, a nearby park, or an easy commute. Later on, once you’ve established a clear financial sense of how much home you can afford, revisit your must-haves list. If you don’t have the money you need to buy the home you want, you can take steps to save for a downpayment, set up a debt payment plan,or consider other incentives to help afford a home. Get to know the local markets you’re buying in to understand what trends could affect homebuying in your area. Each province, town, and city, has varying housing trends which affect the price and value of the home you’re considering.
- Pre-qualification uses self-supplied information on income, debts, and finances to estimate how much of a mortgage you’ll qualify for. This can be a great starting place if you’re curious about what you might afford.
- Pre-approval generally happens when you’re ready to meet with a real estate professional and start looking at homes. Pre-approval uses verified income statements, credit scores, and financial documents to give you a verified amount, available for a limited time, that you can use to make an offer on a house and show a seller that you’re able to afford the property.
2. Borrowing the maximum amount for your mortgage
You might find that your mortgage pre-approval allows for a bigger loan than you expected, especially if you’re someone with a steady income, a good credit score, and a balanced checkbook. In this case, it can feel right to buy the most expensive home you can afford. But treat this optional lending space like a credit card; just because the total amount is available, doesn’t mean you should maximize the offered loan. Consider your financial situation and what you plan to do over the next 5, 10, or 20 years. If you agree to a pre-approval that’s based on your current income, you might not have the choice to jump into a freelance career, the extra cash flow to fund your business, or have the money you’ll want to put into your child’s financial future. So use your financial advisor and online home affordability tools to build a roadmap that makes sense for you before you start shopping for that place with an indoor pool.
3. Not asking enough questions
It’s great to trust the experts, but they’re there to help you make the best decisions. Communicating well helps your agents, brokers, and experts to guide you effectively, and allows you to compare rates, homes, neighbourhoods, and financial options.
From the pre-approval process and comparing interest rates, to questions about the maintenance needed for your new home or the importance of a certain school district, take time to ask about what’s important to you.
If you’re meeting with a broker or agent, check whether they’ll be the one directly working with you throughout the process, or whether someone else will be your go-to once the paperwork is signed. Feeling comfortable with the people you’re working with will give you the stability you need to make informed, clear-headed decisions. Don’t hesitate to ask anything that comes to mind. A great agent will support your search and value your questions, even using them to narrow down your options to something that truly suits your needs.
4. Failing to leave room for surprise expenses or closing costs
This point piggybacks on the importance of asking questions. It’s imperative to consider and ask about the costs that aren’t part of the amounts you’re seeing up front. Plan for surprise costs and leave room for unexpected expenses. It’s wise to put aside at least 2-5% of your total home cost towards closing costs. Use a homebuying checklist to walk through the process and consider the financial implications of each step.
- Compare rates and ask questions to establish any potential costs like attorney’s fees, closing costs, appraisal fees, pest inspection, fumigation, and other costs.
- When you’re looking at a home, carefully consider the maintenance requirements and the home inspection results to think about how each season will look living in this home. What kind of upkeep is required? How is your new home insulated and what might your heating bill be? Think about the age of the home and how the electrical and plumbing systems have been maintained.
- Prepare for financial surprises. Buildings from the 1920s or earlier might have issues like lead paint or outdated systems that affect their resale value or safety. What will you do if you begin to renovate the bathroom and discover mold? Look for signs of mold, flooding, slanting floors, cracks, poorly sealed windows or doors, or strategically placed furniture when you’re doing a walkthrough of a home.
5. Ignoring the big picture or failing to think to the future
When you’re excited about a new home, you’re likely focused on this stage of life and imagining your current lifestyle in the potential new home. If you have young children, you’re likely focused on schools, or if you love to garden you might be elated about an adjoining plot of land. But securing a home involves an assessment of your big picture life plans, including what life might look like over the next few decades.
- Consider potential dependents like older parents and whether you might want to have space for them to move in if they’re in need of support or care.
- If you plan to change jobs, consider whether you’ll be working from home or if you might want to be close to a city. Think about public transit options based on potential paths or life changes you may make.
- If you’re moving to the country and plan to have children who will commute to school, consider how long the drive will be and if you’ll like the seclusion when they leave the home as young adults.
- Are you able to easily close up your home if you plan to travel for extended periods of time, or will there be management costs to ensure the property is maintained?
- If you plan to grow old in the home you’re purchasing, how could changes in mobility, ability, or health impact your ability to access the home and the surrounding area? Will you still be able to access care or groceries if you aren’t able to drive? How many stairs are there to access each level of the home?
- Ask your agent about the future value of your home and consider new construction, zoning changes, and anything that might change the future value of your home.
Houseful can help you shop for homes with confidence
Houseful provides personalized guidance for your real estate journey. If you’re a first-time homebuyer, our dedicated team of experts offer support from initial planning through to moving day. Use our advanced filters to search for homes based on school rankings, neighbourhoods, and financial guidelines. Work with top-rated, local real estate agents and gain access to financial insights and advice from RBC Home Advisors.
Start your home search with Houseful.
Find more information on how to buy a home, how to sell your home, and mortgage and finance tips, see our Home Journey How-To’s or sign up at houseful.ca.