The real estate market has gone insane. At the moment of writing this article, we may fortunately be see some softening but it’s a seller’s market and homes are attracting multiple offers and selling for huge premiums. This has left our younger clients to start asking whether it is an appropriate time to purchase their first home. While its certainly does vary by client, I thought it would be prudent to outline the issues that first time buyers can control and prepare for.
Shopping for a home is exciting, exhausting and a little bit scary. In the end, the aim is to end up with a home you love at a price you can afford. Sounds simple enough, right? Unfortunately, many people make mistakes the prevent them from achieving this simple dream. Consider these tips to get the most out of a purchase and avoid making the costliest mistakes.
Know What You Can Afford
What your financial institution says you can afford and what you know you can afford or are comfortable with paying are not necessarily the same. Lenders are sometimes to quick at advance credit at levels you may not need. Mortgage qualification is not just based on the house anymore. It is based on the maximum amount of credit lenders are willing to extend to you and may be a combination of a mortgage and a line of credit. Sometimes people do not know that they are comfortable in paying.
Start with a budget. Make a list of your monthly expenses. Don't forget major expenses that only occur once a year that you pay annually. Subtract this total from your take home pay and you'll know how much you can spend on your new home each month. When calculating this figure use a mortgage calculator to research current interest rates. This will give you an estimate of what your total mortgage payments will be.
“The ache for home lives in all of us, the safe place where we can go as we are and not be questioned.” Maya Angelou
Don’t forget to include home inspections, title insurance and the costs of a lawyer. On top of that are moving expenses, service hookup fees and any renovations or repairs you want to make before moving in. And you're going to need to have the cash on hand to pay those bills.
If you end up looking at homes that are outside your price range, you'll end up lusting after something you can't afford, which can put you in the dangerous position of trying to stretch beyond your means financially or cause you to feel unsatisfied with what you actually can afford. You may even learn that you can't afford the type or size of home that you desire and that you need to work on reducing your monthly expenses and/or increasing your income before you even start looking.
In today’s climate of homes selling over asking, one needs to be careful about the actual market value of the home. What we are currently paying for properties is not necessarily the value assigned to it by your mortgage lending institution for mortgage borrowing.
Further, what you think you can afford and what the lender is willing to lend you may not match up, especially if you have poor credit or unstable income, so make sure to get pre-approved for a mortgage before placing an offer on a home. In today’s market, it is vitally important to know what you qualify for. You’ll be wasting your time if you sign a contract and then discover later that your financial institution won't lend you what you need, or that it's only willing to give you a mortgage that you find unacceptable.
Be aware that even if you have been pre-approved for a mortgage, it can fall through if you do something to alter your credit score, like finance a car purchase. If you cause the deal to fall through, you may have to forfeit the several thousand-dollar deposit you put up when you went under contract for the home.
Consider Additional Expenses
Once you're a homeowner, you'll have additional expenses on top of your monthly payment. Unlike rent, you'll be responsible for paying property taxes, insuring your home against disasters and making any repairs the house needs (which will occasionally include expensive items like a new roof or a new furnace).
If you're interested in purchasing a condo, you'll have to pay maintenance costs monthly regardless of whether anything needs fixing because you'll be part of a condo owner association, which collects a couple of hundred dollars a month from the owners of each unit in the building in the form of condo fees.
Being Too Picky
Go ahead and put everything you can think of on your new home wish list, but don't be so inflexible that you end up continuing to rent for significantly longer than you really want to. First-time homebuyers often must compromise on something because their funds are limited. You may have to live on a busy street, accept outdated decor, make some repairs to the home, or forgo that extra bedroom. Of course, you can always choose to continue renting until you can afford everything on your list - you'll just have to decide how important it is for you to become a homeowner now rather than in a couple of years.
“You can’t have everything you want, but you can have the things that really matter to you.” Marissa Mayer
Even if you can't afford to replace the hideous wallpaper in the bathroom now, it might be worth it to live with the ugliness for a while in exchange for getting into a house you can afford. If the home otherwise meets your needs in terms of the big things that are difficult to change, such as location and size, don't let physical imperfections turn you away. Besides, doing home upgrades yourself, even when you have to hire a contractor, is often cheaper than paying the increased home value to a seller who has already done the work for you.
Being Swept Away
Minor upgrades and cosmetic fixes are inexpensive tricks may be made by seller's that can play on your emotions and eliciting a much higher price tag. Sellers may pay money minimal upgrades or on staging. If you're on a budget, look for homes whose full potential has yet to be realized. Also, first time buyers should always look for a house they can add value to, as this ensures a bump in equity to help you up the property ladder.
Don't get a two-bedroom home when you know you're planning to have kids and will want three bedrooms. Similarly, don't buy a condo just because it's cheaper when one of the main reasons you're over apartment life is because you hate sharing walls with neighbors. It's true that you'll probably have to make some compromises to be able to afford your first home, but don't make a compromise that will be a major strain.
Neglecting to Inspect
It's tempting to think that you're a homeowner the moment you place a deposit on a home, but not so fast - before you close on the sale, you need to know what kind of shape the house is in. You don't want to get stuck with a money pit or with the headache of performing a lot of unexpected repairs. Keeping your feelings in check until you have a full picture of the house's physical condition and the soundness of your potential investment will help you avoid making a serious financial mistake.
In today’s market, we need to bear in mind that a home inspection, as a condition of sale, may not be possible. Many offers are having to go in clean to even have a chance of being considered. So, while an inspection before closing is ideal, seriously consider whether you are comfortable foregoing one. What some sellers are doing is having a pre-inspection completed and offering the report to potential buyers. This can serve as an alternative to including it in your offer. This may go someway to alleviate the fear of buyers hesitantly deciding to forgo a pre-closing inspection.
“Remember that not getting what you want is sometimes a wonderful stroke of luck.” The Dalai Lama
Hire an Agent
I can’t say this enough in today's market. Once you're seriously shopping for a home, don't walk into an open house without having an real estate agent (or at least being prepared to throw out a name of someone you're supposedly working with). Agents are held to the ethical rule that they must act in both the seller and the buyer parties' best interests, but you can see how that might not work in your best interest if you start dealing with a seller's agent before contacting one of your own.
Today’s market is brutal and agents are using many different and creative methods to get the job done for the buyer… and the seller. It is way to competitive to go it alone and with the materiality of the money involved, it is in your best interest to ensure you are acting on prudent advice and are prepared for the many unexpected situations you may encounter.
Think About the Future
It's impossible to perfectly predict the future of your chosen neighborhood, but paying attention to the information that is available to you now can help you avoid unpleasant surprises down the road. Some questions you should ask about your prospective property include:
- What are the future development plans?
- Can your street become a major street?
- Will a highway be built in near you in future?
- What are the zoning laws in your area?
- Is there undeveloped land? What will be built?
- Have home values in your area been declining?
I’ll give you an example of some very expensive large scale homes that were built in my community a few years ago. The new home owners were enamoured with the beautiful lots, that they paid premiums on, that backed onto mature forests. Seemed like Shangri-La, right? Well it was until a new developer acquired the land bordering these prestige properties, tore down the forest, and built new townhouses. Now the beautiful big windows, that used to overlook the forest, now overlooked people having breakfast. The lesson is to research the zoning and future development plans for the lands neighbouring a property before you buy it.
If you're happy with the answers to these questions, then your house's location can keep its rose-colored luster.
The Bottom Line
Buying a first home can seem stressful and overwhelming, and it isn't without its share of potential pitfalls. If you're aware of those issues ahead of time, you can protect yourself from costly mistakes and shop with confidence. For many people, a home is the largest purchase they will ever make, but it need not be the most difficult. In the words of Baden Powell, be a good scout and be prepared. It is a wise move in Keeping Life Current.
Steve is the SBCN Community Mentor and can be reached at steve@NorthernRiverFinancial.ca