Common Mistakes Millennials Make When Buying a Home

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You’ve cut back on Starbucks, taken a second job and borrowed money from mom and dad. Well done! You are ready to put down a wad of cash to cover the 20% down payment on your first property. But don’t make first-time homebuyer mistakes, like trusting your bank to look after you. In reality, the best mortgage rates are not usually offered up front. You need to invest some time to shop around and look into subsidies, discounts and programs like the Home Buyers’ Plan for first-time homebuyers. Here are some wise things you should know before you sign on the dotted line.

Putting every last cent into a down payment

It may be tempting to pour all your savings into your first home, it may not be the best idea with today’s sky-high prices. Several decades ago, it was normal to borrow $200,000 to $300,000 mortgages, whereas now, first-time homebuyers are borrowing $700,000 to $800,000.

In the event that you divorce, or your car needs repairs, those monthly mortgage payments may be impossible to meet. You may end up losing your job and having to sell quickly because you canot afford the monthly payments!

Fix: Set aside some money. Have a buffer of about 6 to 12 months of living expenses in an emergency fund.

Rushing to buy a condo, when you want a house for your future

Millennials may be delaying having children, but they will eventually want a family or a big dog. Unfortunately, both need space to run around. Many first-time homebuyers can’t wait to have a house so they rush into buying a condo first. However, starting to ascend up that ladder may be riskier than holding off and continuing to save. The downfall is that if you buy a condo and the monthly payments prove to be too high to allow to also save, you will have to kiss your dreams of owning a backyard goodbye, or at least delaying your plans.

Fix: Do not put a short-term investment ahead of long-term goals.

Mixing up online calculations with reality

Millennials will not know what true heartbreak feels like until they bid on their dream home, only to have the offer fall through in financing. Do not be fooled by putting all your trust in online calculators to tell you how much you can afford. These are merely a guide but do not account for things like your credit score, which can affect your mortgage rate.

Fix: Go to a bank and go to a lender. Find out what you will be approved for exactly and make sure to check your credit score.

Thinking the amount a bank will lend you is what you can afford

Up until now you’ve had a cell phone bill, a hydro bill and some student loans. When you buy a property you may wrongly assume that you’re only adding a single extra bill — the mortgage, to that list of monthly payments. The truth is there are many costs that lenders don’t factor in when calculating what you can comfortably afford.

If you forget to budget for additional expenses — grocery trips, insurance, property taxes, car maintenance — you may soon find yourself back in your basement apartment.

Fix: You should not focus on how much you’re able to borrow, but rather on how much you should borrow. There is a big difference. Add up all your current living expenses, plus the extra expenses associated with home-ownership that you can think of, then tack on at least 5% to 10% of your monthly income for savings. Circle that number in red, because that’s what you really can afford.

Placing too much trust in your mortgage adviser

As an inexperienced first-time homebuyer, you’re more likely to depend on what the professionals tell you. However, you can never assume any mortgage professional knows best, is lending at the highest rates, or is giving you the most accurate information.

Fix: Verify your information. Shop around. See that their rates are competitive, that they have disclosed all the potential downsides of the mortgage they’re recommending and that they gave you a competitive analysis on why their offer is the best for you. Make sure that they are experienced in the industry and know what they are talking about.