This week we are sharing pointers for first-time buyers who are looking to purchase their first home. The move from renting to owning can be fraught with pitfalls. Over the years we’ve identified tendencies which can cause issues. Below are five tips we recommend that first time home buyers follow when transitioning from renting to owning a home.
Know your monthly housing budget and set a realistic purchase price
First-time buyers need to be aware of how much they can spend. The maximum mortgage qualification established by lenders is solely based on income. It doesn’t take lifestyle and spending habits into account. A better baseline, which we recommend, is to set the monthly housing costs at the amount of your current rent plus whatever you save each month.
For example; at $1500 / month rent and savings of an additional $400 / month you would start with a $1900 / month housing budget. If the amount doesn’t cover what you need for your mortgage we can drill down into lifestyle and spending habits and identify changes that are sustainable for you long term. It’s not uncommon for first-time buyers to accumulate credit card debt when stretching for a purchase price that exceeds their lifestyle.
If the lifestyle doesn’t change, credit card debt becomes the norm which we want to help you avoid.
Keep some cash on hand
Many first time buyers make the mistake of putting all of their savings into their down payment leaving no funds for emergencies. We recommend keeping a minimum of 3 months of living expenses in savings to cover any unexpected hardships like illness or job loss. Mortgages are based on cash flow so it’s important to keep a small reserve aside in case life throws you an unexpected curve ball.
Buy a suitable property
While feeling emotion for a certain unit is great, logic should also play a role in what first-time buyers purchase. We have seen countless cases where emotion takes over and logic goes out the window.
Fixer uppers, outdated units needing renovations or, Strata complexes facing significant depreciation necessitating future assessments, have been purchased by buyers who don’t possess the skills or resources to pay for what is coming down the road.
We recommend home inspections and reading Strata Minutes and Depreciation reports to ensure what you’re purchasing is a good fit. Conversely, if you’re buying below your means and you are handy, a fixer-upper may be perfect for you!
Review the need for life and disability insurance
Purchasing a home and taking on a mortgage is a significant financial change. We often see first time buyers waiving insurance citing they think they have sufficient coverage through work or some other group plan. There should be a pause to consider what will happens should the unexpected occur. Although life insurance is not a favourite topic it makes financial sense to acquire it while you’re young.
It may pay off your mortgage or make your mortgage payments in the event of disability. Unfortunately, statistics show we are six times more likely to become disabled than perish.
Get pre-qualified for your mortgage, not pre-approved
With lending guidelines continuing to tighten and lenders wanting more efficiency, a pre-approval isn’t what it used to be. These days most lenders offer rate holds and omit a thorough review of income, credit, down payment and supporting documents.
It’s become standard practice for lenders to do their due diligence after an offer has been accepted. Diligence at this stage can introduce surprises, significant problems, delays, or even leave buyers without financing after they have made a no subject offer. Our team pre-qualifies first time buyers. This means completing a credit application and collecting all supporting documents to identify potential risks ahead of making an offer.
The only item we wait to do our due diligence on is the property which we can review before you make an offer. If you’ve been told you are pre-approved and haven’t completed an application or provided all of your supporting documents, you could be in for an unpleasant surprise.
Buying your first home should be an exciting and positive experience. Our team are experts in working with first-time homebuyers. We look forward to working with anyone you know who is considering a purchase. Thanks again for your amazing support and have a fabulous weekend!
Embark on your road to homeownership by downloading our guide below