10 Mortgage Mistakes First Time Home Buyers Can Avoid
You’re excited! You’ve decided to dip your toe into the rushing river that is Canadian real estate and buy your first home. But the roaring sound of that river can be overwhelming. Where to start? Your mortgage financing is one of the most critical aspects of your first purchase. And you want to get it right.
With so many choices, brands and products you might prefer to take an ostrich like approach and bury your head in the sand to avoid the racket. While you don’t need to understand all of the finer details of mortgage financing you should be mindful to avoid some common mistakes that I’ve observed over the years. Below I’ve listed 10 mortgage mistakes to avoid for first time home buyers.
1. Not Checking Your Credit Your credit score is very revealing and allows the lender to get a clear picture of your credit risk. The first thing you should do when considering a mortgage before even talking to a mortgage broker or lender is have a look at your credit report. This way you can make sure that you have time to make any necessary improvements before applying to lenders. You can check your score on the Equifax website.
2. Applying for New Credit At The Same Time As Your Mortgage Part of the algorithm that calculates your credit score looks at how recently you’ve requested credit. Seeking credit through a car loan or credit card while you’re applying for a mortgage can negatively effect your score. If possible it is best to avoid applying for credit. By the same token, it is best to avoid large purchases like automobiles because the large monthly payments will effect the total mortgage amount you qualify for.
3. Failing to Look at the Total Housing Payment I often sit down with first time home buyers who think that buying a house costs less than renting because the mortgage payment is less than their rent. What they fail to realize is that there is a lot more to home ownership than mortgage payments. We use the acronym PITH in the mortgage industry to account for all aspects of your monthly payment (Principal + Interest+ Taxes+ Heat). You also need to account for your insurance costs and/or condo fees.
4. Skipping The Pre-Approval Before shopping for a home, make sure you can actually qualify for financing by getting a pre-approval. A pre-approval means that a mortgage lender has had a look at your credit and considered your income to determine how much mortgage you can realistically afford and in turn how much house you can buy.
5. Failing To Prepare Your Assets Believe it or not one of the most challenging parts of the mortgage approval is showing your liquid assets to the lender for the down payment. Lenders are required by the Anti Money Laundering and Terrorism Act to request a 90 days look back of all your accounts to see the source of your down payment. It is not enough to just show a deposit in your account 7 days before closing. Gifts are allowed under particular circumstances.
6. Job Hopping Lenders are looking for income stability and consistency. If you have been a busy bee jumping from one employer to the other the lender may decide not to approve your mortgage. If you are changing jobs within your industry there is leniency depending on the overall strength of your application but if you are making any major changes it might be best to wait until after your purchase or hold off buying for a few months at least until your probationary period has expired.
7. Not Shopping Around The mortgage market is dynamic. At any given time different lenders could be offering great interest rate specials or products that suit your needs. If you only visit your bank branch they will only offer you their product and rate. Mortgage brokers work with multiple lenders right across the Canadian market and know where to find the best rates and deals. They are like your personal shoppers. The best part is you don’t pay for their services because mortgage brokers get compensated by the lender through a finders fee.
8. Chasing Exotic Mortgage Programs When it comes to banks and lenders if a deal sounds too good to be true then it probably is. In a market where most borrowers are fixated on rate it is easy for lenders to structure mortgages in such a way that the rate looks good but they eliminate all other privileges or worse can’t be broken without paying all of the interest due over the term of the mortgage.
9. Forgetting to Lock Your Rate You may feel that you don’t need a pre-approval because you have strong credit and plenty of income and down payment. The pre-approval also serves an equally important function other than giving you a figure to work with. The pre-approval works as a ratehold to lock in an interest rate for 120 days. If rates increase while you are searching for a home you have the benefit of a protected rate.
10. Not Reading Your Mortgage Documents When you finally make an offer to purchase a home the lender converts the pre-approval into a commitment letter where they spell out the specifics of the mortgage. This is an important document to review and read as it contains all of the terms and conditions of the mortgage including your obligations, costs and privileges. I always read it together with my clients to translate it into normal English. Make sure you understand it and ask questions.
I hope you found these 10 mortgage mistakes to avoid for first time home buyers useful to help guide you and avoid making some costly aggravating mistakes.
Feel free to continue the conversation below. If you have any other pitfalls to add to my list feel free to share below. That way we can create a source of information for other first time home buyers to help them out.
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