Keeping Your Budget Intact In a Hot Housing Market
Winston Churchill was quoted as saying, "Let our advance worrying, become advance thinking and planning."
In a competitive housing market, amidst the many bidding wars you might find yourself in, this quote rings pretty loud.
As human beings, we have a knack for competition and sometimes emotional or sporadic decisions in the process. There are times for those moments, house buying should never be one of those moments however. In a hot housing market that you might find yourself in, you have to be aware of not only the factors at play when purchasing your home, but also the constraints you may have regarding your budget. Some homes you might bid on right out of the gate and stay in the fight until someone's offer gets accepted, other homes you might have to be willing to walk away from (as much as it can pain you).
The competitiveness in the housing market all comes down to lack of inventory in the market and this is what drives up house prices. In the end, the offer that typically gets accepted is the one who is willing to go all-in on the house, even if its way above asking price.
According to a Realtor.com survey, 39% of buyers went over their budgets to purchase a home during the pandemic. Where many buyers get in trouble is when they get into the throes of competition for a particular home. Here are a few critical tips to help you budget for the competition and with these tips, always remember that if you have to walk away from the deal, the journey is not over, it only continues until you find the right home.
Budget for the Pre-Approval
Sure, you got pre-approved for a certain amount so you might be thinking to yourself that you can afford every last dollar in that pre-approval letter right? Think again.
What you want to do is sit down and comb through your finances to make sure that you are set on a certain amount to put down for a down payment as well as figure out how much you want to pay monthly for your mortgage. Make sure to add in the property taxes, HOA fees, insurance and maintenance to your budget too for an overall breakdown of how much you want to spend on your home by itself. The gold standard is about 25-30% of your income just on your home. Otherwise you risk purchasing your home and being "house-poor", which simply has you at a deficit for other expenses because you are putting all your money towards the cost of the home.
Anticipate Other Costs
When you get your home, things break or need repair at some point. Maybe you opted into getting a home warranty plan that covers your home for a couple of years (which is always a good thing starting out). Nevertheless, you want to always anticipate in your budget to have money set aside for crucial repairs such as AC/heater repair, water heater repair, structure damage repair, appliance replacement/repair, etc. Another thing to put money aside for is for those renovations you want to make over time. Around 50% of new homeowners wished they budgeted for the hidden costs once they became homeowners.
Look for Homes In or Under Your Budget
Always be strict about which homes you are looking at with respect to your budget. You might find that the homes you are looking at will go above asking so if you find a home that is below your budget, you might have some wiggle room to make competitive offers.
Talk With Your Lender
While everything above is important, you might want to shuffle talking with your home lender to a priority spot on your list. Lenders will be able to see the financial view from a vantage point and give you the scenarios that may happen if you decide to go down certain routes, along with the amount of money you need to put down and the potential monthly payment and taxes involved with the home you are hoping to purchase. Here at Arrowhead Capital like to make sure that you are in the best financial position so that when you make your offer, you are going in with the strongest possible options available. Plus, we like to make sure you are sticking to your budget goals throughout the process.