Albert and Jin Lee were looking for a home in the Boston area in December. So far they have had no luck in a glowing real estate market.
The couple, who need more space for their newborn, have a budget of between $ 700,000 and $ 1 million. Now the Lees are thinking of stretching it.
“It was kind of a crazy supermarket,” said Lee. “Real estate agents have said that some houses are getting 80 offers.”
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According to the National Association of Realtors, there were 28.2% fewer housing stocks in March than a year earlier. At the same time, the extremely low mortgage rates are spurring demand for homes and triggering bidding wars that drive prices up.
Debbie Barrera, a broker-dealer at Realty Austin in Austin, Texas, said she had never seen a market like this. In some cases, buyers offer $ 100,000 above asking prices. In one case, she said, a buyer offered $ 500,000 and asked for a home with a pool.
“It’s just crazy, there is no other word to describe it,” she said. “It’s a frenzy.”
In this overheated market, balancing a competitive supply with what you can afford requires keeping a cool head. Here are some questions to consider when looking to go beyond your initial budget to buy a home.
How Much House Can You Afford?
As a rule of thumb, you only need to spend between a quarter and a third of your gross monthly income on your mortgage payment and between 35% and 45% of your gross monthly income when you include alimony, taxes, and insurance.
“It’s got this idea from a balanced investment perspective: you don’t want to get so invested in your home that you run out of money for something else,” said Sarah Behr, a San Francisco-based financial advisor.
If you’re making $ 100,000 a year, you should try to spend around $ 2,340 a month on your mortgage, or a little more or less depending on your financial goals like spending, paying off debt, and saving for retirement. Don’t forget to factor in the closing costs, which can range from 2% to 5% of your loan amount.
What if i qualify for a larger loan amount?
Because of the subprime mortgage crisis in 2008, lenders are now following strict debt-income guidelines to help calculate whether you can afford to buy a home. Not knowing your particular financial goals, you could qualify for many more homes than is in your best financial interests.
“There’s what is sensible and what you should do, and then there is what you can get away with,” said Peter Donisanu, chief financial strategist at Franklin Madison Advisors in Pittsburgh. “In the current credit environment, there are banks that, in some cases, will lend you up to 50% of your gross income. Just because you can borrow so much doesn’t mean you should. “
For your deposit, 20% of the cost of the house is the gold standard, but not always required. If you are saving less than 20%, expect mortgage insurance. According to Freddie Mac, this can cost anywhere from $ 30 to $ 70 per month for every $ 100,000 borrowed until you’ve paid enough capital to hit the 20% equity level.
Whatever you choose, be sure to reserve six months’ worth of expenses in case of an emergency. Certain repairs and improvements, such as: B. a leaky roof, can hardly wait.
According to the National Association of Realtors, a home was up for sale in Brooklyn, NY in March when the U.S. had 28.2% fewer real estate inventories than a year earlier.
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Are you ready for lifestyle changes?
Look at your budget over the six months leading up to the pandemic to get an idea of what your spending will be. Then think about what you want to cut out.
Ms. Behr cautions that it is unrealistic to believe that you can drastically cut your expenses even if you commit to lifestyle changes.
“I don’t think it’s realistic to take people who travel to Hawaii every year and drive a nice car and assume that they will only eat rice and beans or never go on vacation again,” she says. “People don’t just change their habits dramatically.”
On the other hand, you might find that you can afford more home than you originally planned. A customer of Ms. Behr’s who moved to Houston from the Bay Area couldn’t find anything she liked under her original budget of $ 800,000. After calculating the cost of preschool, annual vacation, childcare, and other financial priorities, her client realized that her budget could expand without great sacrifice.
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What does it cost you to wait to buy a house?
If you are in an area that has seen employment growth and immigration, such as Austin, it could be much more expensive to buy a home in the future.
But if you can wait a year or two, it might make sense to hold back. As more houses come loose in the market and fewer bidding wars arise, there could be more opportunities to buy at reasonable prices.
“Certainly, prices can continue to rise for months. But like other asset prices, property values are unlikely to rise in a straight line forever, ”Donisanu said. “They have buyers ‘markets and sellers’ markets. We are in a seller’s market today. “
In Miami, Anibal Torres, a mortgage lender at Regions Bank, believes there may be more inventory after the mortgage leniency expires in the summer. For customers who can’t find anything in Miami and are unwilling to look a little further north or south, he advises waiting too.
Why are you buying a house right now?
It is important to carefully weigh the pros and cons of buying a home at this point: are you doing this because of pressure from family and friends or fear of missing out?
“You could put the money to better use and pay off expensive debts first instead of weighing on your budget,” said Donisanu, who added that Pittsburgh homes sometimes get 20 to 30 bids.
Things like credit card debt and student loans could be worth paying back before diving into the current real estate market. “You could get yourself in a better financial position first before taking this extra stretch,” he said.
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