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.
Following are the four biggest financial mistakes of first-time homebuyers:
1. Spending the Maximum on Housing
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.
Financial experts recommend that consumers decide how much they want to spend each month on housing before meeting with a lender.
2. Not Getting Prequalified Early Enough
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.
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.
3. 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.
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.
4. 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 mortgages and adjustable-rate mortgages.
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.
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