Mistakes To Avoid When Applying For Your First Mortgage

First-Time Homebuyers’ Four Biggest Money Mistakes:

First-time homebuyers will almost always make a few mistakes when buying a home. They may pay too much, pick the wrong type of mortgage, or they may overlook budgeting for home repairs or improvements.

To help prevent such mistakes work with a trustworthy and experienced lender. With a little initiative you can find lenders with solid reputations. Start by asking family members and friends for their advice.

Have a current Credit Report. Give yourself plenty of time to make sure any mistakes or repairs are taken care of before you set an appointment with a lender.

Below are the four biggest financial mistakes that many first-time homebuyers make:

1. Devoting the Maximum Income Toward Housing - Lenders qualify buyers based on their incomes and debt-to-income ratios.  They don’t take into consideration how much the borrower spends on everyday items such as transportation, food, and other essentials.

Financial experts suggest that consumers decide how much they want to spend each month on housing before meeting with a lender. When setting up a budget, make sure to allow yourself some room for a partial loss of income or for future expenses such as children. Don’t maximize your budget. Know and stay within your limits!

Be prepared for payment shock. A new homeowner may go from paying $500 per month in rent to a $1500 monthly mortgage payment.

2. Neglecting to Get Prequalified Early – The first step toward homeownership is scheduling an appointment with a reputable lender for a consultation on obtaining a mortgage. Don’t wait until you are ready to start house hunting before contacting a lender.

You can never be too early in setting up a consultation with a lender. Getting prequalified as early as possible in the process will help if you need to make changes or correct any possible errors.

It is important to keep in mind that a buyer 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. Create long-term financial goals and strategies for buying a home.

3. Confusing the Importance of a High Credit Score - Most consumers know how important it is to have a high credit score, but not everyone understands how costly a low score can be.

Mortgage lending is based on consumer credit scores. A credit score of 720 or above will earn you the best interest rate, and will save you thousands of dollars over the extent of your loan.

A credit score of 680 to 720 can get you good mortgage rates, but a credit score of 620 is the lowest score to qualify for most loans.

While going through the mortgage process it is very important to remember to avoid applying for new credit or taking on new debt. A second credit check is often required before settlement and you don’t want the score to lower.

4. Settling on the Wrong Mortgage Loan - First-time homebuyers typically settle on a 30-year fixed-rate mortgage, because of recent horror stories regarding the dangers of interest-only mortgages and adjustable-rate mortgages.

Consider home loan alternatives to a 30-year-fixed. Sometimes they can make more sense for your situation. For example, a buyer that is certain they will be relocated by their employer within five years may find that a 5/1 ARM suits them better.

A 15-year fixed-rate loan is another option to consider if you are eager to build equity in your home or you are older and want to live mortgage-free in retirement.