Mortgage Shopping Tips for the First-Time Home Buyer

If you are about to embark on the biggest purchase of your life and the inevitable mortgage debt that goes along with it, you need to get educated. And not just by talking to the bankers, mortgage brokers or real estate agents either. They can provide you advice and, ultimately you will need to work with them on purchasing and mortgaging your home at some point.

But, remember, they are in the business to make money, first and foremost. No matter how great their advice, you need to know yourself, what your needs are and what terms you can or cannot live with in the long run.

So, before you even talk to a potential lender, here's just a few tips and insights from an experienced mortgage shopper:

Go with a mortgage you can afford, not necessarily what the lender will give you.

You may be surprised to find a mortgage lender will approve you for more than you can comfortably carry every month. Keep in mind, they are evaluating your situation based on salary information and standard expenses that go on top of a mortgage payment - eg condo fees; heat and hydro; property taxes; and any outstanding debt you may have, credit cards included.

They don't know your SUV may be sucking up $100 a week in fuel, or you like to rent a cottage for two weeks in the summer or you plan to have a child in the next two years. And frankly, they often don't care. What they care about is their business which means getting you into a mortgage according to their standards.

It's easy to get excited when you find out from the potential lender you can go as much as $60,000 beyond what you had expected. Wow, that's fabulous, until you've actually bought the house and realize, you're maxed out because you are now struggling to live within your standards, not theirs.

Suddenly you are deciding between renting the latest hit movie OR ordering in a small pizza. Whenever you bring your car in for an oil change, beads of sweat start to build up as the mechanic recommends you rotate the tires too. (And how much life have you got on that old beater anyways before you need another $25,000 to replace it?)

Mortgage lenders, even the nicest, most sincere ones, don't necessarily care about the many other aspects that will influence how much you, personally, can really afford. In every instance of mortgage shopping I've experienced, I was approved well beyond my comfort level. We're talking tens of thousands of dollars difference. Thankfully, I've always stuck to my original game plan, even in a fierce sellers market, when it is the most tempting to keep upping your bid against all the other buyers lined up at the door. (And, gee, I was pre-approved for much more, so why shouldn't I go higher?).

Do yourself a big favour and factor in financial breathing room into monthly expenses. Not just for emergencies but, the nice things that make owning a home special. There's nothing wrong with making sacrifices to get the home you want but, don't let mortgage maximus rob you of actually enjoying it. Besides what's wrong with a little unexpected cash left over at the end of the month, anyway? I'll take the risk of running a monthly surplus rather than a deficit anytime.

Get comfortable running the numbers yourself. There are quite a few easy-to-use online mortgage calculators you can use before you walk into a bank. Play with a few home price scenarios applying a fixed five-year rate (if you plan to go variable with your mortgage- you should still be able to at least afford the current five year fixed rate) and get a good understanding of what your monthly expenses will be. Add on the gas bill, hydro, condo fees etc. Don't guess - get actual figures from friends and family. You can count on one thing, none of these home expenses will be going down in cost anytime soon. I can guarantee it.

Once you settle on how much you can and want to dole out every month on all your home expenses, you'll know the housing price range you should be shopping within. Stick to this range, no matter what the emotional drive is to go higher.

It's not just the best interest rate you need to shop for, it's also the lending terms.

The reality is, five years in a person's lifetime can be, well, a lifetime. It's hard to predict. Anything can happen which would potentially impact your financial, or personal situation. Whether you are a young urban professional or a couple of newlyweds, the unpredictable - good or bad - can alter your game plan significantly.

Suddenly you are up for a transfer to a new city and you need to sell your downtown condo loft. Or interest rates are dropping like rocks in the river and you're only one year deep into a fixed five-year term that keeps looking too high. Or your spouse just inherited $25,000 from a very generous uncle and you'd both love to apply the unexpected lump sum to the mortgage. Or maybe the honeymoon didn't last as long as you had planned and, two years into the perfect marriage, you need to get out (the divorce rate is still at 50%, last time I looked). These are all real-life scenarios. I have lived through at least one, and so have many other people I know.

Don't get overly zealous about the best interest rate to the point you neglect the finer details related to the terms of the mortgage, including getting out of the mortgage early if need be. You could end up being very sorry. The facts are mortgage terms do vary, probably more than you realize.

For example, I once went to a mortgage broker my real estate agent had recommended to me. He offered me a good rate but, the terms his lender had attached to it were not so hot.

The broker's lender had a clause that would have forced me to pay my property taxes to them directly, rather than the municipality, on a monthly basis. I questioned the clause and the broker told me it was because I wasn't in a conventional mortgage (ie, with 25% down payment). I told the broker, first of all, I didn't want to pay taxes on a monthly basis. I'd make the interim lump payments as they come due, as is my right to do so. Secondly, I wanted to pay taxes owing to the municipality directly, not in advance to the lender who would collect my money, then pay the taxes on my behalf when they came due. What am I, twelve? I was looking for a good mortgage, not a good babysitter.

There was no logical reason for me to accept this term, yet, the broker was adamant this was a standard condition applie to any non-conventional mortgage, not just by this particular lender. Well, I knew what he was saying simply wasn't true. In the end, after shopping around, I negotiated a better rate directly with a bank without the silly clause of paying property taxes to a third party.

In fact, the final mortgage I went with didn't offer the lowest rate. There was one other lender with a slightly better variable rate but, the pre-payment terms were rigid and the maximum amount I could pre-pay without penalty was relatively low. So, I opted for the very slightly higher interest rate and have since taken full advantage of the ability to throw more money down on my mortgage, when I had it, and switch back to the basic bi-monthly payment when I didn't, without question or hassle of any sort.

The point is, if I didn't take the terms of the mortgage just as seriously as the interest rates, or worse, neglected to review them altogether because the low rate got me starry-eyed, I could have committed to a condition I didn't want to live with. In most instances, those small print terms can, in the end, cost you money.

Try to get a mortgage with the least amount of conditions and the highest degree of pre-payment flexibility and weigh them against the rates being offered. Clearly understand how the lender would calculate the penalty if you needed to get out of the mortgage before the end of your term. Yes, there are consistencies between lenders but, all mortgages are not created equal. Assume nothing is fixed.

Oh, and if you know anyone personally who is in banking and can give you an unbiased opinion, have them review the terms. I did and it made me feel much better knowing I had their unbiased, expert opinion.

Beware of bullies. You don't owe anyone anything until you sign the mortgage agreement.

When you are purchasing a new home, particularly for the first time, you are already under enough pressure. You don't need a banker, mortgage broker or real estate agent to add to this.

Unfortunately, you may feel a hard nudge into hasty commitments from at least one of these professionals during the home buying process. I've experienced real estate agents pressuring myself to "move up" to a higher price level and have also felt the squeeze from mortgage brokers during the pre-approved mortgage phase as well.

For instance, I received a follow up phone call at my office from a mortgage broker I had met with once. He asked me to come in and sign some papers to ensure I was "locked-in" and didn't lose the great rate he had offered me. Locked-in? I hadn't even purchased a home yet.

When I reiterated the fact that I was still shopping my options and, since I hadn't even purchased a property yet, still had lots of time to do so, his tone turned from friendly to less than cordial. He actually made a threatening statement, something about this oh-so special rate not being around when I needed it.

He also told me - and he's not the only professional to use this - how I shouldn't shop around as it would hurt my credit rating. Having too many credit checks at one time, to some brokers, will drop your credit rating to the point where no one will touch you because it "sends flags" that there is an issue with your credit rating and you are now, somehow, a bad risk.

Don't fall for this. It is a scare tactic to get you to feel committed to a lender too soon in the shopping process. Feeling committed to a mortgage lender at this point is like feeling committed to buying a new car just because you took it for a test drive.

It is normal for anyone buying a home to shop around, so a high amount of credit checks will appear on your record. Creditors aren't stupid. A bank isn't going to suddenly say, "Sorry, Mr. Smith, we're not interested in your business because you've had too many credit checks lately and seem risky to us now" when they know you are looking for a mortgage. As long as you have a good credit rating already established, you'll be fine. It's more important to be paying your credit card balances on time.

Again, if I had been a bit greener and this was my first time-out, his tactics might have worked. Many first-time buyers mistakenly believe the pre-approval is a pre-commitment to them. It is not. It's actually a pre-commitment to you based on the information you have provided the lender or broker about your income and current debt. Being pre-approved is simply assurance so you can shop for the house in the right price range without worry. You haven't committed to anything.

Don't feel either legally or emotionally obliged to stick with a lender just because they got you a great rate - that's his job - or because he's been a super nice guy (which is his job too, I would think). This isn't about making a new friend, it's about doing what's in your best interest, for years to come. In fact, you can easily make the decision of which lender to go with weeks, before closing on the house. As long as you've been pre-approved, just sit tight.

Having said that, pre-approvals normally only last 90 to 120 days. So if you haven't found a home within that time and rates look like they are on the rise, go back to the lender before the end of the pre-approval period and see if they will hold the lower rate. Don't get panicked and rushed to purchase a home because you see the clock ticking on your pre-approved rate. You could probably negotiate the extension of the better rate. If not, never kick yourself for taking the time to find the right home, at the right price. I took a year to find my last home in a tough market and I never felt like I over-paid. Never.

In conclusion, go ahead, talk to the professionals when you are ready to shop around. Just do a bit of homework first. You should know the questions to ask, the pitfalls to look out for and the amount of debt you can reasonably manage every month.

At the end of it all, regardless of your inexperience, you need to be the one driving the negotiations towards a mortgage that works best for you. You can't do this if you know nothing at all. After all, knowledge is power, as the saying goes.

Happy first-house hunting!