They’re often heedless, emotional, rigid and, even worse, uninformed.
September 22, 2010 VIVIAN SONG
Experts say they see the same rookie mistakes in first-time homebuyers who are entering the housing fray: they don’t do their research, underestimate their finances, and let their emotions carry them away.
But with falling house sales and declining prices in the GTA, first-time buyers may find that market conditions are currently in their favour.
“We’re moving towards a balanced market right now,” said Mark Salerno, GTA district manager at the Canadian Mortgage and Housing Corporation (CMHC). “Because the pace of sales has slowed, houses remain listed for longer, which gives people more time to do research, and do their homework without any pressure.”
To help first-time homebuyers avoid making the same rookie — and costly — mistakes as their predecessors, experts at CMHC and the Toronto Real Estate Board have provided some helpful advice on common homeowner traps.
Mistake 1: Jumping into homeownership without understanding the implications.
Just because market conditions seem ripe doesn’t mean you’re ready to become a homeowner. If you’re a renter, the first thing to do is check the terms of your lease agreement, says Bill Johnston, president of the real estate board. What are the conditions of termination? Can you sublet?
“Fifteen-hundred dollars in rent can be a significant burden if you suddenly find that you’re stuck,” he said.
The CMHC also reminds first-time buyers that being a homeowner means being responsible for all payments, repairs and maintenance, which requires additional time and money. If you have an unstable jog, or if you’re not prepared to deal with leaky pipes or spend the weekend shovelling and painting, you may want to reconsider buying.
Mistake 2: Not getting pre-approved.
Shopping for a home without getting pre-approved could dash your dreams if you set your sights on houses that are out of your price range: you need to know how much you can afford to play with.
One of the first orders of business is to get pre-approved by a lender. Your pre-approval will depend on your gross household income, down payment, credit history, assets and liabilities. Online mortgage calculators can give you a rough idea of your maximum loan amount.
The general rule lenders use to determine your maximum mortgage is that your monthly housing costs — mortgage, taxes, heating and other expenses — should not exceed 32 per cent of your gross monthly income. Secondly, your debt load should not be any more than 40 per cent of your gross monthly income, which includes housing costs, car payments and credit card payments.
Mistake 3: Underestimating the costs.
Don’t forget that in addition to your mortgage, the closing costs for sealing the deal can range from 2 to 5 per cent of the home purchase price. That includes lawyer fees, home inspection, deposits, land-transfer tax, moving expenses, property tax and home insurance.
If you’re buying a house, chances are you may have to purchase major appliances, furniture, window treatments and lawn or snow-clearing equipment, as well as connection fees for cable TV, phone and Internet. If you’re buying a condo, you have to factor in maintenance fees.
It’s also estimated that maintaining your house will cost 1 per cent of the home purchase price per year.
Mistake 4: Having preconceived notions of downtown or suburban living.
Here’s where our experts are divided. Although the knee-jerk reaction may be to look farther afield to the suburbs to get more bang for your buck, first-time homebuyers need to look at the whole picture, advises Salerno of CHMC.
“If you work in the city, while your house may be more expensive, the proximity may mean you don’t need two cars, or before- and after-school programs for the kids,” he said. “I would caution people to really think about the time it takes to live in the suburbs.”
He also reminds prospective homeowners that condos usually come with amenities, such as swimming pools and gyms, and are also typically close to city parks.
Johnston, on the other hand, advises expanding your horizons and keeping an open mind about location. A knowledgeable realtor, for instance, could find the exact home you’re looking with all the amenities you need — just in a different neighbourhood than you wanted.
“A realtor will give you options,” he said. “For instance, I ended up in Richmond Hill and I swore there was no way I would live north of Steeles Ave. But I love it.”
Mistake 5: Not considering the resale value of the home.
“One of the things with homebuying is that you have to step back and recognize that while you are moving into the house now, you will move out years later,” Salerno said.
Try to look at the house objectively, experts say. In addition to considering how it fits your needs, consider if it could also fit the needs of future homebuyers, such as families and couples. Although a nearby railway or highway may not disturb your sleep, it may be a major deterrent for future buyers.
Check zoning and development plans for the area, especially if there are vacant lots, empty fields or underdeveloped areas.
Take a drive through the neighbourhood and check out the level of amenities nearby, such as grocery stores and shopping, as well as the quality of schools.
Mistake 6: Not shopping around for the best mortgage.
Don’t make the mistake of bellyaching about your high-interest mortgage because you didn’t take the time to shop around.
Mortgage brokers are great resources because they will act on your behalf and try to secure the lowest possible rate. Because they’re paid by the lender, there’s no additional fee for you.
You may also miss out on valuable first-time homebuyer incentives if you fail to do your research. For example, the federal government introduced a First-Time Homebuyers Tax Credit last year that could provide up to $750 in federal tax relief for eligible buyers.
For those who buy a fixer-upper, you can also apply for a home renovation mortgage, or purchase plus improvement, which lets you finance the purchase and renovations as one loan.
“Everyone is frenzied in the homebuying process,” Salerno said. “The buyer wants to get into the house and the realtor doesn’t want to lose the sale, which can result in all parties missing opportunities.”
Mistake 7: Not doing a home inspection.
Here’s where the adage “Don’t judge a book by its cover” applies. Don’t be fooled by the little old lady who reassures you the house is a well-oiled machine.
Behind shiny new, stainless steel appliances could lurk rotting wood, busted pipes and families of rats. You’re already plunking down wads of money to buy your dream home; you don’t want another loan to fix things you never knew were broken.
If you find yourself in a bidding war, no matter how much you want the house, don’t make the mistake of forgoing the home inspection as a condition of purchase.
Mistake 8: Letting your emotions dominate.
Homebuying can be an emotionally charged event, especially for first-timers who are making the biggest purchase of their lives. But letting the heart overrule the head can cloud your judgment and end up costing you dearly.
“The mistake a lot of buyers make is that they get caught up in the frenzy of the marketplace, which is driven by fear and greed,” Johnston said. “Buyers who are lined up in multiple offers will then end up paying too much for a property.”
Take advantage of today’s quieter market, but do your research first.
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