A house is likely to be the most expensive purchase you’ll ever make. And if you’ve waited a long time for this day to come, you’ve undoubtedly thought about the features you desire – maybe you’re craving a huge master bedroom with walk-in closets, or perhaps a gourmet kitchen.
While you don’t want to skimp on the amenities you love, adding too many can drive up the cost and destroy your budget. By thinking about your long-term financial goals and assessing your budget before you buy, you can score the home you want without experiencing buyer’s remorse.
Budgeting Tips for Buying a House
1. Establish a Firm Price Limit and a List of “Must Haves”
When you’re pre-approved for a mortgage, your bank determines how much they think you can afford to spend on a house. But don’t assume the number they provide is the amount you should spend. Just because the bank thinks you can afford to spend $300,000, that number likely does not take into account your overarching personal budget or financial obligations.
Go online and use a mortgage calculator – after you enter a sale price, a loan term, and interest rate, the calculator estimates your monthly payment, including homeowners insurance, property taxes, and private mortgage insurance. This can provide you with a good estimate of how much you can afford to pay based on sales price, but don’t stop there. Research whether there are other expenses you’ll need to work into your budget after buying a home.
For instance, will you have to pay monthly home owner’s association dues? Are you going to need to contract with a lawn or pest service? Are your utilities likely to increase after your move? These costs can really add up and eat into your monthly budget, and if you’re not willing to sacrifice your current lifestyle for the sake of a new home, you’d be wise to choose a less expensive home with a lower monthly mortgage. Use online services, such as Trulia and Realtor.com, to scope out homes within your desired price range, then start prioritizing your list of wants based on this budget. If you decide in advance which amenities are “must-haves” and which would simply be nice to have, you’ll be in a better position to stay within budget when you start looking at homes.
2. Keep Tabs on Your Real Estate Agent
I’ve had only positive experiences with my real estate agents, but not everyone is as lucky. When working with a real estate agent, it’s important that you communicate your budget clearly, emphasizing the need to stay within that budget. Good agents respect your finances and only show you homes you can afford.
That said, some agents may try to push the envelope and recommend properties outside your price point. Be firm and stick to your guns. If you find your agent is persistently asking you to look at more expensive homes, it’s probably time to find a new agent.
3. Don’t Compare Yourself to Others
It’s very easy to fall into the cycle of “compare and despair.” If you’re working with a budget of $250,000 and your best friend just bought a house for $300,000, you might find yourself comparing your home options and amenities to his or hers.
This is a nasty cycle to fall into, especially when it comes to buying a home. A house isn’t a pair of shoes or an expensive handbag – if you overspend when buying a house, it isn’t easy to recover from the mistake.
Rather than obsessing over the fact that your friend bought a house with an outdoor kitchen, offer your congratulations, and then get excited about what your $250,000 budget can do for you. Maybe you’ll have four bedrooms instead of two, or you’ll have a gas oven instead of an electric one. Then, think about the ways you’ll benefit from staying within your budget, such as maintaining a healthy vacation or retirement fund, or starting a college education fund for your kids.
4. Avoid Bidding Wars
Imagine this scenario: You find the perfect house, you make a solid offer…and then your realtor calls to inform you that the seller has multiple offers to choose from. Competing with other buyers is no picnic, and to win a bidding war, you often have to increase your offer. This isn’t necessarily bad, as long as you’re able to stay within budget – however, bidding wars can get out of hand quickly.
If you get caught in a bidding frenzy, you could end up spending more than you want. Decide how much you’re willing to pay for a particular house in advance, and resist the urge to exceed that limit. In other words, be willing to walk away.
5. Bid on Houses That Aren’t Selling
Some buyers shy away from homes that have been on the market for a long time, assuming that there must be some hidden defect. But sometimes, a home’s inability to sell is much more simple. For instance, maybe it just has bad curb appeal, or there’s too much inventory in a particular market.
Therefore, it is important that you do not automatically rule out a house just because it has been sitting for a long time. If anything, seek out these houses. The seller is probably motivated and willing to drop the asking price to move the property. This is especially good news if you fall in love with a house that’s slightly higher than your budget.
Even if the seller isn’t willing to drop the price, there are still more opportunities for negotiation when a home has been on the market for months. For instance, you may be able to ask for contingencies to replace the old carpet or paint the home’s exterior. If you can identify the reason the property hasn’t sold, then you can ask the seller to reduce the home’s asking price or provide a cash allowance for the fix.
If you’re still concerned about possible hidden defects, state in your bid that the offer is subject to a satisfactory home inspection – which is a good idea no matter what. If the home inspection reveals problems, such as issues with the plumbing, electrical system, roofing, appliances, or windows, you can ask the buyer to make the needed repairs, or you can take your offer off the table.
Staying within budget when buying a house takes discipline, so you must approach the buying process with care. Know what you’re willing to spend, and refuse to look at homes listed above your budget. If you’re unable to find a suitable property after a few weeks or months, revisit your budget to see if you have any wiggle room. If not, hold out – it’s only a matter of time before the right house comes along.
How did you stay within budget when shopping for a house?