Tips to avoid making a bad loan choice
Many first-time buyers make the same five mistakes when selecting a personal mortgage
Real estate and mortgage specialist-George Christopoulos knows all too well the mistakes first-time buyers can make when it comes to shopping for a home loan.
“They do some research on the Internet and assume they can go out into the marketplace by themselves,” he says. “But they’re usually not prepared properly.”
Here are five common mortgage mistakes first-time buyers make.
1: Failing to plan
Rookie homebuyers often leave mortgage matters till the last minute. “Then they’re scrambling around and don’t even know if they can afford the mortgage on the home they’re buying,” says Christopoulos.
He recommends a saner approach: get started early, before you begin house-hunting. Make a budget and determine the maximum mortgage payment you can comfortably handle, accounting for costs beyond the mortgage, like utilities and home maintenance. It’s also wise to factor in an eventual rise in interest rates.
Estimate how much money you’ll have for your down payment. And leave enough time to review your credit file to ensure there are no discrepancies. “Even for people who have really good credit and no issues, sometimes errors are made and credit files get messed up,” says Christopoulos. “If you leave things until the last minute, and something pops up on your credit history that needs to be corrected, it’s not a good feeling when you’re spending $400,000.”
“When a deal seems too good to be true, it usually is.”
CALUM ROSS MORTGAGE BROKER 2: Assuming pre-approval means it’s a done deal
Novice buyers might assume pre-approval for a mortgage means they’ve been approved. This is wrong — there are many variables that could impact whether you end up getting the mortgage for which you’ve been pre-approved. The lender — and/or CMHC if you’re being insured on your mortgage — may not give the OK to the property you want to purchase.
“It could have been a grow-house,” says mortgage agent John O’Neil, raising one of the more horrifying home-buying possibilities. “There are a hundred different reasons why (a lender) may not like the property. And if they don’t like it your preapproval is worth nothing.”
O’Neil has had clients who’ve gotten pre-approved, then gone out and bought a new car. “The (lender) repulls your credit file and says, ‘What’s this Toyota on here for $400 a month?’ Suddenly you don’t qualify anymore because your total debt is too high.”
3: Taking the lowest interest rate
It’s understandable that people might want to go with a mortgage that offers the lowest interest rate. “But the lowest rate is not necessarily the best deal,” cautions Christopoulos. Mortgages with lower interest rates often come with clauses that can result in excessive penalties if, say, the borrower wants to break the mortgage early. Lower interest rates can also come with restrictions on mortgage refinancing and prepayments on the loan.
“When a deal seems too good to be true, it usually is,” says mortgage broker Calum Ross. “The reality is a 0.1 per cent difference in interest rate will look like a very small savings when you consider what you lost in opportunity cost in pre-payment privileges.”
4: Getting into a bidding war
With all the sensational stories about bidding wars these days, it might be tempting for first-time buyers to fantasize that they too will be able to do battle when they find their dream home. Steer clear, says O’Neil. Just because you think it was worth $50,000 over asking doesn’t mean the lender will agree.
“Let’s say you overpay for the house and you get an appraisal and it doesn’t appraise for what you paid for it,” he says. “They’re going to go with the lower of the appraised value or purchase price, and then you have to make up that difference.”
5: Not vetting your service provider
Whether you go with a mortgage broker or deal with a bank or lending institution directly, make sure you’re working with a competent mortgage professional. “When you know nothing about buying real estate or getting a mortgage, any real estate agent or mortgage broker sounds intelligent,” says Ross.
Vet mortgage professionals to ensure they have sufficient educational credentials and a solid track record.
“Working with the top people makes a big difference in the customer service experience and saves you a lot of hassle,” Ross says.