PARAMOUNT MORTGAGE - LENDER'S BLOG

Four Big Money Mistakes of First-Time Homebuyers

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 expenses or improvements.

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

Spending the maximum on housing

Lenders qualify buyers based on their incomes and debt-to-income ratios. However, borrowers also can spend a considerable amount of money on items such as transportation, savings, food and other necessities that are not counted in the ratios.

First-time buyers can be overly optimistic and excited about buying a home, so they tend to borrow the absolute maximum they can afford.

Instead, they should allow some wiggle room for a partial loss of income or for future unforeseen expenses such as children.

Not getting prequalified early enough

Many first-time homebuyers start house hunting before contacting a lender. This can be a time-wasting misstep if they have unknown credit report errors or other credit problems.

All buyers need to get prequalified early enough in the process so that, if needed, they can make changes to their financial situation. If an error shows up on their credit report for example, it will take time to correct it.

Some buyers may need to spend up to a year saving more money for a down payment, increasing their income, or to correct credit problems.

Misunderstanding the importance of a high credit score

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

Mortgage lending is done with a tier of interest rates and terms based on consumer credit scores. A credit score of 720 or above will earn you the best rates and save you thousands of dollars over the life of a loan when compared to lower scores.

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.

Choosing the wrong mortgage product

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 and adjustable-rate mortgages. Alternatives to a 30-year-fixed loan sometimes can make more sense.

If a buyer will be relocated by his or her employer in five years, there's no reason to pay a premium for the 30-year loan when a lower rate 5/1 ARM (Adjustable Rate Mortgage) may be a much better loan product for their situation.

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 financial goals.