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Buyers who have been preapproved for a mortgage may be tempted to shop for homes at that lender allowance amount. But real estate pros and financial experts advise setting a limit somewhat lower than that figure.
House hunters should look at homes with list prices that fall below the top of their price range because they likely will need to leave room in their budget to bid up in the competitive housing market.
“These days, houses are selling for more than their list price and, as a buyer, you’re more than likely going to end up in a bidding war,” Lori Ozley, a manager with Birmingham HomeBuyers in Birmingham, Ala., told realtor.com®. “If you look at properties that are under your budget, you’ll have room to submit a competitive offer that goes above the asking price.”
For example, buyers who have a preapproval letter for $375,000 may fall into the trap of wanting to shop for homes that list for $375,000. But homes often sell for much higher than the list price these days. That could spell disappointment for buyers who continually get outbid. A real estate professional can help them set a more realistic price level to shop at based on their preapproval allowance.
The advice to shop below the top of their budget may seem obvious to real estate professionals, but buyers may still be surprised by how much they’ll have to stretch their budgets to afford a home they want. The temptation to shop at the top of a budget may be even more pressing. The median existing-home price in December 2021 climbed nearly 16% compared to a year earlier, reaching $358,000, according to National Association of REALTORS® data. Adding to costs, mortgage rates are rising. The 30-year fixed-rate mortgage averaged 3.55% last week, up from 2.73% a year ago, according to Freddie Mac.
The housing market remains competitive and bidding wars are typical. In December 2021, REALTORS® reported that the average number of offers they received on their most recent sale is about four. That has held mostly steady over the past year as bidding wars remain elevated, according to the December 2021 REALTORS® Confidence Index Surveypdf.
Source: REALTORS® Confidence Index Survey, December 2021
Sixty-four percent of millennials between 25 and 40 say they have at least one regret about purchasing their current home, according to a 2021 Bankrate poll. The top regrets include maintenance and other costs and mortgage payments all being too high. Thirteen percent believe they overpaid for their property.
Financial and real estate experts advise clients to factor in the additional costs of homeownership when bidding on homes, including maintenance costs, utilities, association and insurance fees, and more. Home buyers who get in a bidding war may lose sight of additional housing costs. Even when they are able to stretch their budgets, they need to ask whether they really can afford to do so.