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When ZeQuesha Holmes-Hutton started looking for homes in North Carolina, she knew she wanted to find one in her budget. “I wanted something I could afford and live my life and not just be working to pay my mortgage,” she says.
The problem: The homes that met her needs in Charlotte, where her daughter lived, were expensive and drew a lot of offers. Shopping largely online while still living in New Jersey, Holmes-Hutton perused about 150 homes. Eventually she broadened her search, considering houses farther away from the city.
Then Holmes-Hutton found the one: An older home in Troutman, about a half hour drive from Charlotte. When her real estate agent showed her the home, “It was like something clicked and it was like, ‘ZeQuesha, this is your house,’” she says. It was the third home she put an offer on, and for $275,000, it was hers.
Home prices have gone up dramatically in the last couple of years, with the median listing price topping $400,000 for the first time ever in March. The problem is that there aren’t enough houses on the market and too many people trying to buy. That leaves buyers in a tough position, having to compete with dozens of others for the few homes available, with bidding wars quickly driving prices to unaffordable levels. After facing that sticker shock of seeing your “dream home” might be out of reach, buyers are looking at what tradeoffs they have to make to become homeowners.
“My goal was to own a home,” Holmes-Hutton says. “It didn’t have to be the best home on the block. My goal was to accomplish being a homeowner.”
Experts say there are a few steps you can take when you find the prices you see on listings don’t match up with your budget. Here’s their advice.
Plan Before You Look
Buying a house is a big decision, and it requires preparation. Kelsey Wakefield, a realtor in Chico, California, says she starts her clients out with a buyer consultation to go over the process. Even before that, or at least before they start looking at homes, she wants them to talk to a mortgage lender about what they’re qualified for and how much house they can afford for their desired monthly payment.
“Let’s reverse-engineer it and tell the lender I don’t want to be over $3,000 a month on my mortgage, so with your down payment and your estimated interest rate, what does that maximum purchase price look like?” she says.
That calculation means don’t necessarily start looking at houses priced around what your lender has preapproved you for. Make sure you have a budget and you know just what you’re willing to pay for a house, says Sean Pearson, a certified financial planner in Conshohocken, Pennsylvania.
If you know houses in your area are selling for higher than the asking price, don’t even bother looking at homes close to the top of your budget. Factor in the expectation that you’ll have to bid higher before you start thinking about placing an offer.
“As soon as you get into the financial implications of any decision, most people will have a conversation where they sit down and say this is what we think our budget is,” he says. Know what you’re spending now and what you’re willing to spend in the future. Then fire up the home listings.
Before Holmes-Hutton even started looking at houses, she said she started working on her credit, studying how it worked for hours every day. That helped her understand what programs were available to her. “You need to know what’s out there for first-time homebuyers in your state, what they offer, what those things entail,” she says. “Do your homework first. You need to know the basics.”
Set Your Priorities
As you’re considering the financial implications of buying a house – and whether you want to spend more than you anticipated – think about what you value in life. Pearson says you should consider your most important financial goals. If your first goal is to travel, your second is to get the latest new electric vehicle, and entertaining at home is third, don’t jeopardize your top two for a bigger house.
“Don’t feel like you have to break your budget,” Pearson says. “You’re probably going to have to sacrifice somewhere.” That may mean buying more of a “starter home” than getting your dream home right off the bat.
Beyond the financial aspects of the home purchase, think about what you want in your living space, because you’ll probably be in it for at least a few years. That could be the location, the size, the number of bedrooms, a big kitchen, a garage. That’s different for every homebuyer, Wakefield says. “Most of my clients want a yard because they have animals or they just want a space,” she says. “A lot of them have been living in apartments or condos and they’re tired of living on top of their neighbors. They just want more legroom.”
Once you know your priorities, avoid the temptation of houses that are too expensive. Wakefield says she tells clients to look at homes a little under their top price range, as houses tend to go for higher than asking. If a buyer’s limit is $550,000, for example, only look at houses that are $525,000 or less. “I’m not going to waste their time and I’m not going to waste my time by not writing good offers that aren’t going to get accepted over and over again,” she says.
As you start looking, you might not find any houses that have everything you want. Wakefield tells her buyers to follow the “80-10-10 rule,” that is a home with 80% things they like, 10% things they can live with, and 10% things they can change. “The reality is no house is perfect unless you’re building it yourself, and even then there’s stuff you mess up that’s not perfect,” she says.
Don’t let cosmetic issues get in the way of an otherwise good home, Wakefield says. Paint and floors are relatively easy and cheap to change, especially when compared to the price of a house. The same goes for cabinets, countertops, windows, and landscaping, all of which can be adjusted to suit your needs. “There’s lots of things you can change if you save up money,” she says. “The only things you can’t really change are the location of the home and the floorplan.”
Keep those costs in mind when you’re setting your homebuying budget, Pearson says. Beyond cosmetic changes to turn that new house into a home, factor in maintenance and potential repair costs. You never know when the roof or sewer might need an expensive repair. “Just buying the house is part of the equation, but certainly not the whole thing,” he says.
Adjust Your Budget
Beyond changing your expectations for what kind of home you want, you might find yourself looking for ways to increase your budget a bit to get the right house. When you do that, understand what’s changing in your budget, Pearson says. That starts with having a budget and knowing what you spend money on. From there, you can determine whether the extra few hundred dollars a month that will have to go toward the mortgage will come out of cash you’ve been using for non-essentials, or whether you don’t have that money to spare.
“Is that just coming out of the fun and food budget or is that coming out of retirement savings?” he says.
Adjusting your budget also means having realistic expectations about your finances in the long-term. A 30-year fixed rate mortgage isn’t going to change significantly over time, whereas rent would and your income very well might, Pearson says. If you’re squeezed when you first buy the house, make a plan to increase your income in the next few years. And keep an eye on big expenses like renovations if you end up going over your budget. “Stuff will change and it’s okay and pretty normal for people to move in and feel like we just spent oodles of money here,” he says. “Take a breath.”