When to increase your home budget and when to stick to your plan

According to Brian Copeland, a real estate broker in Nashville, Tennessee, before the pandemic red, there was a simple profile that constituted an “A” buyer.

“Four years ago, an ‘A’ buyer was someone who was pre-qualified for a loan, got a 3% discount and was able to go out this weekend and buy a home,” said Copeland, president of the Greater Nashville industry association. Agency. “Now, one buyer ‘A’ has all the cash.”

Additionally, today’s top buyers are willing to forego appraisals and inspections and, in some cases, not even see the home they’re buying in person.

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“Everybody is being squeezed,” Copeland said, adding that affordable housing for the middle class is “absolutely miserable.”

Prices are rising

Americans are aware of the difficulties they face when buying a home. More than 70% of US adults believe the housing market is currently in a bubble, and more than half think it’s a bad time to buy a home, according to a survey of more than 7,000 adults from Momentive. .

Price is a key factor in retaining potential buyers – about 38% said they have delayed or canceled a home purchase plan due to inflation. People of color are also more likely to push through with home purchases due to rising costs, the survey found.

“More disrupted or delayed home-buying plans among these groups risk exacerbating the wide disparity in home ownership rates,” said Jon Cohen, research director at Momentive. race and ethnicity”.

In February, the median sale price for homes in the US was $357,300, up 15% from a year earlier, according to data from the National Association of Realtors.

At the same time, mortgage rates are also on the rise, meaning that buyers who need a loan will also have to pay more for them, said Danielle Hale, chief economist at Realtor.com.

That could hurt younger consumers as well as first-time buyers, according to Hale. It also means that home ownership as a route to wealth building is now out of reach for many.

Peter Murray, a broker and principal at Murray & Co. “It’s a very competitive market for those shopping to the fullest extent of their budget,” said Real Estate in Frederick, Maryland. “There was a lot of disappointment.”

Maths

Some homeowners may be tempted to stretch their budget to buy a home, especially if they’ve had months of searching and overbid.

According to Marguerita Cheng, a financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland, that can make sense in some cases.

“There are situations where I’ve told people it’s okay to stretch, but just understand the impact it will have on other areas of your life,” she says.

For example, you might pay a little more if moving will reduce other costs or if you anticipate a lifestyle change will free up room in your monthly budget. This could include going from two cars to one, or having kids soon entering public school, meaning you no longer have to pay a lot for babysitting.

If you’ve calculated your budget using your base salary, which doesn’t include any bonuses, you might as well be able to afford more, she says. And, if you don’t have consumer debt, save enough for retirement, and have a solid emergency fund, there may be more possibilities than you first think.

The length of time you are expected to stay indoors is also important. If you’re looking to live in a home for more than five years, you should pay a little more now.

When does not last

On the other hand, there are some situations where it doesn’t make sense to increase your home buying budget.

Cheng says stick with your original plan if paying more makes it difficult to contribute to other financial goals, such as saving for retirement or paying down debt.

“If the only way that stress happens is if they borrow from retirement, I would probably say that doesn’t make sense,” she said.

She also cautions against spending all of your savings on a more expensive home. You need to budget for variable expenses like taxes, insurance, and repairs.

It doesn’t make any sense to stretch your budget to the point where you can only pay with a tax break, says Mr. Cheng. If those benefits are lost in the future, you’re in trouble.

What to do if you cannot pay more

Buyers who can’t stretch their budget have several options.

“They may have to pause their home search or they need to readjust their search criteria,” says Murray.

Stepping out of the buy market can make sense for some people who need more time to save. However, that can also be a bad idea — if prices continue to rise, you could be pushed out of the market even further, says Copeland.

That means rethinking your must-haves might make more sense. That includes looking at different neighborhoods, including those that aren’t as popular or that may be farther from the city center. They may also need to be flexible about the size or condition of the home they buy.

They should also have all the paperwork ready so that when they see a home they like, they can make an offer right away, Hale says.

“To compete in this market, you can either throw more money at the problem or you can really prepare and get ahead of it,” she said.

Working with a financial planner or advisor can help homebuyers understand what they can really afford for a home, Cheng says.

“The loan officer will be really helpful in helping you structure your loan, the real estate agent will help you find a home,” says Cheng. “You might think having a financial planner is the most important thing, but they’ll really help you see how this affects your situation.”

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