There’s a first time for everything and when you finally manage to save enough money to buy your first home, it can be very exciting. But before you start looking for homes to buy, learn from the countless first time buyers before you with these ten common first time home buyer mistakes.
1. BUYING FOR RIGHT NOW
It’s hard not to get caught up in the excitement of it all: you’ve got the savings, you’ve got a great job that helped you get there, and you’re feeling on top of the world about buying your first home.
Buying a house or condo in Toronto is a large transaction and not one that should be done impulsively. When you start outlining your search criteria, consider where you’ll be in five years from now. Are you planning on starting a family? Is there a chance you’ll be relocating or travelling? Ask yourself how your life may be different in a few years to ensure you aren’t buying a home that you will outgrow too quickly.
2. LOOKING AT PROPERTIES BEFORE GETTING PRE-APPROVED
Ask any real estate agent what the first step to buying a home is and they’ll all tell you: get a mortgage pre-approval. A mortgage pre-approval will give you a general idea of how much mortgage you’ll likely qualify for, in turn telling you what your home buying budget is. This means meeting with a mortgage lender and providing them with your financial standing.
What do you need for a mortgage pre-approval? They’ll want to look at:
- your income
- your monthly expenses
- what debt you may have (loans, credit cards, taxes owed, etc)
- how much you have available for your down payment
- RRSPs or other savings
Keep in mind, a mortgage pre-approval does not guarantee you’ll get that amount when you apply for a mortgage. So it’s best to search for homes slightly below the amount given.
Related: How the Stress Test is Affecting Home Buyers
3. HIRING YOUR REAL ESTATE AGENT FRIEND
It makes sense that if you have a friend or family member in real estate that you would presumably work with them to find your first home. But are they really the right person for the job? This can be a common first time home buyer mistake.
There is no shame in doing your homework to find the right real estate agent. You want to work with an agent who is buying and selling real estate full-time, who truly understands the market, and can advocate for your needs along the way.
One of our clients recently wrote this in their testimonial on this very lesson, “This time around to find an agent to sell our condo my wife and I decided not to go with friends and family recommendations but to interview 3 [realtors] based on connections and research within the area and pick the one we liked best. The choice to go with Pierre wasn’t because of just liking him best it’s because he was the best.” Read the full testimonial here.
Related: 5 Questions to Ask Your Realtor Before You Start Searching
4. ACCEPTING THE FIRST MORTGAGE RATE YOU’RE OFFERED
Another common first time home buyer mistake is going with the first mortgage rate you’re offered. When it comes to getting a good mortgage rate, do your homework and don’t be afraid to negotiate. It doesn’t take more than a few minutes to do a quick search online. Websites like RateHub and RateSpy will list the best comparable rates for different banks and lenders.
Once you know what the best rates are, approach your own financial institution first. Many banks will give their own customers a better deal for their loyalty. If you’ve done your homework, you’ll know if they’re offering you a good rate or not. Don’t to be afraid to negotiate a better rate. The worst they can do is say no.
Use our Mortgage Calculator to see how mortgage rates and down payments affect your monthly mortgage
5. WAITING TO BUY WITH A 20% DOWN PAYMENT
If there’s one thing we know for sure, the best day to buy real estate is yesterday. In Toronto’s real estate market, the longer you wait to buy the less your money is actually worth because prices continue to climb.
If saving for the full 20% down payment seems out of reach, paying a mortgage insurance premium with a 5% or 10% down payment can be better than waiting to save the full 20% down. It gets you into the market today so you can start building your equity.
Similarly, you don’t want to use all of your savings just to avoid paying the CMHC insurance premium. It’s better to have a bit of savings on hand so that you’re not living house poor.
Learn more on this topic in Why 5% Down Today Is Better than 20% Down Tomorrow
6. NOT BEING FLEXIBLE ON NEIGHBOURHOODS
Toronto has a neighbourhood for everyone, literally. However, when you’re a first time home buyer, it’s important not to get hung up on one neighbourhood only.
Each neighbourhood performs differently and what may cost $500,000 in one neighbourhood may cost $900,000 in another. For example, based on 2019 average condo prices, the cost to buy a condo in the Danforth/East York area is $434,172 compared to the average price in Leslieville/Riverside which is $756,078. Being open to buying a property in different Toronto neighbourhoods could save you a lot of money on your first home.
Related: The Cost of Buying and Owning a Toronto House by Neighbourhood
7. YOU DON’T HAVE YOUR DEPOSIT FUNDS READY TO GO
First time home buyer tip: have your deposit funds ready to go when you start searching for homes.
Don’t wait until the last minute to have your necessary deposit funds readily available. A real estate deposit of 5% of the purchase price is the norm in our marketplace and if you have to move the necessary funds from one account to another, this may take a few days.
If you’re serious about buying, especially if competition is high in the market, having your deposit money ready to go can sometimes make or break your offer when the right property comes along.
Related: Understanding Real Estate Deposits in Ontario
8. BELIEVING THE LIST PRICE IS WHAT THE SELLERS ACTUALLY WANT
Buying a home in Toronto is not cheap and it can be daunting to pay more than you think you should. Your instinct is to save as much as you can. However, Toronto’s market is very competitive — we’re just so popular, everyone wants to live here — and making a strong offer is the name of the game.
Generally, listings are priced slightly below market value. If a property is listed at $500,000 chances are the sellers are expecting, at the very least, $10,000 to $15,000 over that… and possibly more. This will vary listing to listing but trust your realtor’s guidance when they tell you to offer X. Many first time home buyers who offer cautiously will lose a few offers before realizing what it takes to win.
Related: How Does a Bidding War Work in Real Estate [and How to Win]
9. NOT SETTING A MAX BUDGET IN A BIDDING WAR
When you find a home you love and are serious about making an offer, it’s good to determine what that particular property is truly worth to you. Discuss your absolute maximum budget with your Realtor so you know when to draw the line should your emotions get involved. While your first offer doesn’t need to be at the top of your budget, having a top budget number in mind allows you some room to improve on your offer should you need to. Establishing these boundaries will help keep you on track.
10. UNDERESTIMATING THE COST OF HOMEOWNERSHIP
One of the mistakes first time home buyers make is not budgeting for the costs of owning a home. Once you’ve gotten past the down payment, paid your closing costs, and have the keys to your new abode, the financial landscape of being a new homeowner looks a lot different.
In our blog, First Time Home Buyers: Life After Purchase we outline what your new budget tracking sheet should look like. This includes mortgage payments, utilities, insurance, property tax, maintenance fees or, if you’re a home owner, an Oh Sh*t Fund.
So as you begin your home buying journey, make sure you’re budgeting for the cost to buy and the cost to own that home.
Are you ready to buy your first home? Book a call with my team and we can discuss your financial situation, set up an action plan tailored to your needs, and make your dreams of buying a home a reality.