Buyers Wrestle With Stretching Budgets!
February 3, 2022
The median home price nationwide is about $358,000, up nearly 16% from a year ago, according to the National Association of REALTORS®. Buyers know they have to stretch their budgets to afford homeownership. But how much can they afford?
Many say they are willing to extend their budgets to the maximum to buy a home. Young adults, in particular, say they’d be willing to empty out their piggy banks to win a bidding war. One in six millennials say they’d even be willing to offer $100,000 or more above asking price for their dream home, according to a survey released last week by Clever Real Estate.
House hunters increasingly need to know their budget cap before home shopping, real estate and financial experts say. “Head into a house hunt with your numbers in hand. Know your top number,” Jay Zigmont, a certified financial planner and founder of Live, Learn, Plan, told realtor.com®. “If you can afford a $250,000 house, don’t look at $300,000 houses. You will by nature like the $300,000 houses better and start rationalizing spending more.”
Buyers should seek preapproval for a mortgage, which real estate professionals call a critical first step for setting a budget cap. Banks usually allow up to 28% of gross income as a monthly house payment, Zigmont says. That should include mortgage and all housing expenses, including property taxes, home insurance, and mortgage insurance, if needed.
But borrowers with other debts, including credit cards and student loans, need to factor those into their costs. That will help them calculate their debt-to-income ratio, which lenders will also weigh.
“Lenders usually look for a debt-to-income ratio of 36% or less when underwriting your loan,” says Anthony Carlton, a certified financial planner and vice president and wealth adviser at Farther Finance, told realtor.com®. In all, the borrower’s debts, including the mortgage payment, should total about 36% of your pretax income.
Borrowers can turn to online home affordability calculators that can provide a snapshot of what they could afford by taking into account their income and debts and the size of the down payment.
Source: “In Today’s Insane Housing Market, Just How High a Price Can You Pay? Find Your Exact Breaking Point Here,” realtor.com® (Feb. 3, 2022)