A guide on when to increase your budget and when to settle with the original price as house prices are increasing

As house prices rise, making it difficult for investors and those who want to acquire a home, a simple guide could assist in making some adjustments in pursuing a dream of homeownership.

According to Brian Copeland, a realtor in Nashville, Tennessee, there was a simple profile that defined an "A" buyer before the pandemic's red-hot housing market.

Copeland, who is also president of the industry association Greater Nashville Realtors, said “Four years ago, an ‘A’ buyer was someone who was pre-qualified for a loan, had 3% down, and could go out this weekend and buy a home.” … “Now, an ‘A’ buyer has all cash”

Furthermore, today's top purchasers are ready to forego appraisals and inspections, and in some cases, they don't even see the home they're buying in person, according to him.

He revealed that “everyone is being squeezed.” He added that middle-class housing affordability is “absolutely suffering.”

House prices are rising

Americans are well aware of the difficulties they confront when it comes to purchasing a property. According to a survey of more than 7,000 adults conducted by Momentive, more than 70% of Americans feel the housing market is now in a bubble, and more than half believe it is a bad time to make purchases.

According to the report, price is a big stumbling block for potential buyers, with 38% saying they had postponed or abandoned plans to buy a property due to inflation. People of color were also more inclined to put off buying a home owing to rising expenses.

The chief research officer at Momentive, Jon Cohen said “More scuttled or delayed plans to buy among these groups threatens to exacerbate already wide gaps in homeownership rates along racial and ethnic lines.”

According to data from the National Association of Realtors, the median sales price for homes in the United States in February was $357,300, up 15% from a year ago.

Danielle Hale, chief economist at Realtor.com also noted that Mortgage rates are rising at the same time, which means buyers who require loans will pay more for them.

According to him,  this can affect younger consumers as well as first-time buyers. It also means that homeownership as a means of accumulating wealth is now out of grasp for a large number of people.

A realtor and the principal broker at Murray & Co. Real Estate in Frederick, Maryland, Peter Murray said, “It’s a very competitive market for those who are shopping at the top of their budgets” adding that “There’s a lot of disappointments.”

Money considerations

For Some homeowners, they may be tempted to go over budget to buy a property, especially if they've been looking for months and have not been in luck.

Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland noted that in some situations, stretching your budget is a good idea.

She said, “There are situations when I have told people it’s okay to stretch, but just understand the impact that’s going to have on other areas of your life.”

For instance, if moving would save you money on other bills or if you anticipate lifestyle changes that will free up money in your monthly budget, it can make sense to pay a little more.

This could mean going from two automobiles to one or having children who will soon start public school, reducing your childcare costs.

You may be able to afford more if you've estimated your budget based on your base wage alone, without any bonuses, she added.

There may be more room for flexibility than you believe at first, but that is if you don't have consumer debt, are appropriately preparing for retirement, and have a healthy emergency fund.

The length of time you plan to spend in the home is also important. If you want to stay in a home for more than five years, it can be worth paying a little more now.

When it's best not to stretch

On the other hand, there are times when increasing your home buying budget isn't a good idea.

If paying more would make it difficult to commit to other financial goals, which include saving for retirement or paying down debt, Cheng advises sticking to your original plan.

She said “If the only way that stretch is going to happen is if they borrow from retirement money, I would probably say that doesn’t make sense,”

She also advised against spending all of your money to buy a more expensive home. Variable costs such as taxes, insurance, and repairs must be factored into your budget.

It's also not a good idea to extend your budget to the point where you can only afford it because of tax incentives. You'll be in big trouble if those privileges disappear in the future, according to Cheng.

What should you do if you can't afford to pay more?

There are alternatives available to buyers who are unable to exceed their budgets.

Murray suggested “They either pause their home search or they need to readjust their search criteria”

For those who require more time to save, exiting the buying market may make sense. However, it could also be a terrible move, as if prices continue to grow, you risk being priced out of the market, according to Copeland.

Reconsidering your must-haves may be a better option. This includes investigating various neighborhoods, including those that are less well-known or are located further from metropolitan hubs.

They may also have to be adaptable in terms of the size and condition of the home they buy.

All of their documentation should be prepared so that they can make an offer straight away if they find a home they like, said Hale.

She noted, “To be competitive in this market, you could throw more money at the problem or you could be really prepared and on top of it.”

According to Cheng, working with a financial consultant can help homebuyers figure out how much they can realistically afford to spend on a property.

He said, “The loan officer is going to be really helpful in helping you structure your loan, the realtor is going to help you find a home,” adding that “You might think having a financial planner is over the top, but they are going to really help you see how this affects your situation.”