As I sit here and reflect on my first two home purchases -- a condo in 2007 and a house in 2013 -- I can freely admit I made a lot of mistakes. I may feel like I have a good grasp of how the stock market works, but when it came to real estate I was pretty much lost on my first purchase -- and I know I'm not alone.
A Wells Fargo homebuying survey conducted in September revealed that while most respondents (82%) have a good grasp on how to manage their finances, a good portion of consumers are completely lost when it comes to specifics of the homebuying process. Nearly a third, for example, believed only individuals with high incomes could obtain a mortgage. Furthermore, close to half (44%) had little to no idea what sort of closing costs are required to buy a home.
It's crystal clear that additional information on the homebuying process is needed to help consumers make smarter decisions. And it's especially important that consumers looking to buy a home educate themselves sooner rather than later because lending rates are near a record low, meaning great deals could be had.
So take my plea with sincerity: Please, please stop making these critical homebuying mistakes!
Mistake 1: Failing to shop around
It's likely that you don't have $250,000 in cash to drop on your new home purchase, meaning there's a pretty good chance you'll turn to financing your home beyond your down payment. Far too few people, including myself back in 2007, fail to really shop around for the best possible lending rate.
Little known fact: Mortgage lenders are occasionally negotiable and will sometimes match lower lending rates or other costs in order to get your business. Just like any retailer will attempt to use urgency as a means to close your business, you have to avoid the urge to go with the first lender that will approve you, even if you have less than stellar credit, and instead shop around. Always remember that you're doing the lender the favor by giving them your business -- not the other way around.
Mistake 2: Credit faux pas
Conversely, once you have decided on a lender, make sure you practice self-discipline and refrain from opening new lines of credit or even applying for multiple home loans from different vendors just to see if you'd be approved.
Homebuyers sometimes forget that your credit score is crucial to getting the best possible lending rate on your home. It can also open up more doors by giving you more lenders to choose from. However, if you open multiple lines of new credit each acts as a "ding" against your credit score, potentially putting you on the outside looking in when it comes to getting the best lending rate.
Mistake 3: Maxing out your buying power
This is a critical one to remember: Just because you want it doesn't mean you should buy it. A home of your own is a luxury that some people simply don't have, and you should take into consideration what you really need when making your purchase.
For example, if your mortgage lender approves you for a $500,000 loan it doesn't mean you need to go out and buy a home that, following your down payment, leaves you with a $500,000 mortgage! "Why?" you ask? Because mortgage lending standards take into account your income but don't factor in repairs that will happen at some point during the ownership of a home, such as heating, plumbing, or roofing repairs. If you can't budget for a four- or five-digit repair at or near the maximum approved loan amount then you should seriously consider scaling back the size of your purchase.
Mistake 4: Neglecting a home inspection
Building off of the previous point, never turn down the opportunity to get a home inspection.
I fully understand the thinking of a cost-conscious consumer that wants to save as much money as possible, especially after they realize how expensive buying a home can be. A home inspection can occasionally depend on the size of the home, but they typically cost around a few hundred dollars. It might save money and a bit of your time to forgo the home inspection, but it could wind up costing you dearly in the end. Your home inspection could turn up problems that could turn your dream home into a potential money pit.
Ultimately, a home inspection could save you from plenty of costly near-term repairs. Keep in mind a home inspection isn't fool-proof, but it's a step every homebuyer should be taking.
Mistake 5: Thinking of your live-in home as an investment
Lastly, and this was a big problem prior to the housing bubble in 2008, don't think of the home you live in as an investment.
I completely understand why people scoop up real estate and rent it out to boost their income. But, far too many people are counting on their live-in home to fund their retirement. The problem with this mode of thinking is that while your home does increase in value over time, so does inflation. With the exception of the 1998-current period, which is truly outside of the norm for the housing market over the long run, home price appreciation barely – and I do mean barely – outperformed inflation. Utilizing data from Robert Shiller in Irrational Exuberance between 1950 and 1997 home prices outpaced inflation by just 0.08% annually.
The lesson here is simple: You may see your home price gain in nominal terms, but in real money terms it's unlikely to set you up for the retirement you think it will.
Taking these points to heart isn't going to make you a real estate buyer extraordinaire, but it should give you more than enough knowledge to make an educated buying decision.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of, and recommends Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.