4 money mistakes of first-time homebuyers

By Michele Lerner | Bankrate.com

First-time homebuyers almost always make a few mistakes when buying their home. Perhaps they pay too much,

choose the wrong type of mortgage or neglect to budget for needed home improvements.

Working with a trustworthy, experienced lender can help prevent such mistakes. But consumers also need to take

responsibility for their budgets and choices.

"Before buying a home, consumers need to develop a short- and long-term perspective on their purchase," says

Michael Harrison, area director for MetLife Home Loans in Southwest Ohio.

Following are the four biggest financial mistakes of first-time homebuyers:

Lenders qualify buyers based on their incomes and debt-to-income ratios without considering how much the

borrowers spend on items such as transportation,savings, food and other necessities.

"A lot of first-time buyers are optimistic about the future and excited about buying a home, so they borrow the

absolute maximum they can afford instead of allowing themselves wiggle room for a partial loss of income or for

future expenses such as children," Harrison says.

Financial experts recommend that consumers decide how much they want to spend each month on housing

before meeting with a lender.

"Every buyer should create their own budget and know their limits," says Stephen Adamo, president of Weichert

Financial Services in Morris Plains, N.J.

Adamo says many first-time homebuyers experience a sizable change in their housing payments. Some new

owners may go from $500 per month in rent to a monthly mortgage payment of $2,000, he says.

"You need to deal with payment shock," Adamo says.

Meeting with a lender for a buyer consultation and prequalification for a mortgage should be the first step toward

homeownership. Yet many first-time homebuyers wait until they are ready to start house hunting before contacting

a lender.

"It's never too early to set up a free buyer consultation with a lender," Adamo says. "Every buyer needs to get

prequalified early enough in the process so that they can make some changes if they need to or correct errors on

their credit report."

Some buyers may need to spend up to a year saving more money, increasing their incomes or cleaning up their

credit before making an offer on a home.

A buyer consultation should include creating long-term financial goals and strategies for buying property, Adamo

says.

While most consumers know it's important to have a high credit score, not everyone understands how costly a

low score can be.

"All mortgage lending is done with a tier of interest rates and terms based on consumer credit scores," Harrison

says. "A credit score of 720 or above will earn you the best rates and can potentially save you thousands of

dollars."

A score of 680 to 720 can get you good mortgage rates, while a FICO score of 620 is usually about the lowest

score to qualify for most loans, Harrison says.

Consumers should learn about credit scores the minute they start working, Harrison says.

Websites such as Bankrate provide information about how to improve your credit score.

Even after a mortgage approval, consumers must avoid applying for new credit or taking on new debt, Adamo

says, because a second credit check is often required before settlement.

First-time homebuyers today typically opt for a 30-year fixed-rate mortgage. Their conservatism is a reaction to

stories about the dangers of interest-only mortgages andadjustable-rate mortgages.

But Harrison says home loan alternatives to a 30-year-fixed sometimes make more sense. For example, buyers

certain they will be relocated by their companies within five years may find a 5/1 ARM "could be a much better

mortgage," he says.

"There's no reason to pay a premium for a product you don't need like a 30-year loan," Harrison says.

Homebuyers eager to build equity in their homes or who are older and want to live mortgage-free in retirement

should consider a 15-year fixed-rate loan or, if they can afford it, even a 10-year mortgage to reach their goals.