“If I had to live my life again, I’d make the same mistakes, only sooner” – Tallulah Bankhead.
While this advice is relevant to daily life and growing as a person, home buying mistakes can have lifelong consequences. The average Canadian home price is now hovering just over $480,000. Because we’re dealing with that much money, even the smallest slip up can end up costing you a lot of money.
Unfortunately, there’s a lot of misconceptions or bad advice floating around there. Whether it’s an uncle that’s on his fifth real estate purchase or myths that propagate over time, bad real estate advice is going to cost you.
To help you out, the team at Simple Condo Advice compiled a list of common mistakes made by homebuyers of all real estate experience levels.
Forgetting to check your credit score
If you manage your finances diligently, pay your credit card balances in full and your revolving bills on time, you may still have a horrible credit score.
Why is that? After all, the point of a credit report is for lenders to assess if a potential customer is worthy of a loan.
Any company that’ll grant you a mortgage will check your credit report. If your report is overall negative, you’ll be denied the loan. For persons with rocky credit reports, it can tricky. If you hover around a certain bandwidth of score (in the 650-725 range), lenders may still give you a loan but at a higher interest rate to cover the risk they’re exposed to.
Now imagine you’ve had a spotted credit history but have been correcting it over the past years. For some reason, a glitch in the system gets you negative marks on your file again. Lenders may think you’re back to your old habits. The same goes for people with solid financial backgrounds: if your file inherits someone else’s financial problems, it’ll affect your score.
This is where running a credit report check on yourself comes in handy. If there’s a mistake in there you could have still gotten the loan but at a higher rate. This higher rate translates to thousands of dollars over the life of the mortgage. Let’s look at some numbers to make this clearer:
Let’s take a $325,000 mortgage at 2.4% amortized over 25 years. Over the course of the entire mortgage, you’ll end up paying roughly $107,000 in interest. Now let’s look at the scenario where your credit report got negative strikes from a data entry mistakes. The same lender may give you the mortgage at 2.75% which will end up costing you almost $124,000 in interest.
All Canadians are eligible for a free credit report each year, so take advantage of it!
There’s a lot of bad information floating around regarding credit scores and what affects them. If you want to find out what you may be doing that’s negatively affecting your credit score, you can read our article on credit score myths debunked.
Losing financial discipline once pre-approved
Pre-approval is an often misunderstood step in the real estate transaction process. It’s critical to remember that being pre-approved doesn’t mean you secured the mortgage. It simply means that the lenders took a look at your credit profile, compared it with how much you’re thinking of borrowing and made a decision on whether it’s worth the risk for them. They haven’t yet agreed to lend you the money. On top of that, any rate they quote you for (quote is the keyword here) is based on the financial picture they have at that time. Once you sign for a condo, they’ll go over all the details again and lock in your rate.
A mistake we’ve seen some first-time condo buyers make is once pre-approved, they make major life decisions. Things like quitting a high-paying job to pursue a passion, buying a luxury item like a new car or opening up new unsecured lines of credit can have a major impact on your credit score.
Don’t forget that once you’ve been pre-approved, you still need to maintain that financial discipline that got you pre-approved in the first place. Don’t get complacent with your finances!
The lenders pre-approved you based on the conditions they saw. If you change it up on them, they’ll change the conditions of your loan. Like we’ve shown in the previous example, even a modest change in your interest rate can have significant long-term consequences.
Life throws its share of curveballs, but when you’re trying to get a home loan with a low interest rate, it helps to stay put and hold off on any big decisions. Quitting or changing your job, buying a big-ticket item like a car, cosigning on another loan, charging up your credit, and switching bank accounts can all impact your home loan approval process. Up until closing day, it’s better not to mess with a good thing.
Underestimating the cost of renovations
A natural reflex for many first-time condo buyers is to buy a property that’s 90% of what they expected but that will be perfect once renovated. This makes tremendous sense when applied properly. If your dream condo is too expensive but a unit down the road is $50,000 cheaper but requires $10,000 of renos, why not go with the cheaper one? That’s $40,000 you can shave off your mortgage.
Unfortunately, the average home buyer is horrible at estimating the cost of renos. Once they buy, they start getting quotes in and abandon the project once the real cost is revealed to them. After a few months, they get used to the way the condo is and forget about. When they go to sell, the same feature that got them a great deal becomes a negotiating chip for the next buyer.
The best way to get around this is to get free estimates by legitimate contractors before you buy the condo. Getting a quote is free and all it takes is for your realtor to book another viewing. If you don’t have a reputable contractor on speed dial, realtors are a great resource. They’ll usually has a few trusted tradesmen and contractors in their contact book they can refer you to.
Once you know how much a renovation might cost, keep those quotes with you. Some lenders may approve mortgages where part of the loan can be used to pay for renovations.
The downside to playing it safe and getting quotes for major renos is that in a hot seller’s market, you might get outpaced by experienced condo buyers or deep-pocketed investors. At this point, you’ll need to assess if you still want a “fixer-upper” or go with a newer more turnkey unit.
Getting a monster loan
Everyone wants their dream home. Too bad it’s out of almost everyone’s price range. Like we explained in our guide to buying a pre-construction condo, the first step to any successful condo purchase is to first get pre-approved for a mortgage. Then, the critical part is to look how that mortgage will impact your budget.
If you’re new to the real estate world or a specific market, take advantage of open houses before you find a realtor. The experience will help you get an understanding of what certain features cost. In markets like Toronto, be cautious that what you see isn’t necessarily what you’ll sign up for. The real estate agent may be setting up the property for a bidding war. These can be difficult for new condo buyers to come out on top or worse, may cause them to get a monster mortgage that will leave them cash-strapped every month.
Bottom line is to never lose sight of the fact that you need to buy a property that fits your budget, not what the banks are willing to lend you. They’ll always lend you more because that gets them more money. If you get caught up in a bidding war or the seller is a stiff negotiator, refer back to your budget. Can you realistically swing that mortgage? If you want some money left over at the end of the month for hobbies, travel and leisure activities, get a mortgage you can afford.
Lifestyle changes that impact your daily budget
So you’ve found the perfect condo in the hippest neighborhood. You’ve ran your budget over and over and you can afford the mortgage for that property. Time to sign right?
Not yet.
When shopping around for a condo, whether new or resale, consider how living in that new neighborhood, or even street, may impact your lifestyle. Here’s a list of features to consider when looking at a potential real estate deal:
- Grocery stores
- Daycare or school
- Distance from work
- Wheelchair accessibility
- Distance from family and friends
- Location-specific hobbies
- Dog exercise areas
All these potential lifestyle features change because you’re in a new location could affect your finances. For example, if you need to buy a car because you’re now too far to mass transit or bike to work, you may be on the verge of overstretching yourself financially.
