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.

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.

“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.

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.

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.

Read more: http://www.bankrate.com/finance/real-estate/4-big-money-mistakes-of-first-time-homebuyers-1.aspx