This spring market is starting to heat up, and home buyers are starting to let their fear of not finding a home drive them into price creep. Buyers start house hunting with a particular price range or point in mind, then to “creep” upwards by tens or even hundreds of thousands of dollars, over the course of their house hunting experience or even during the negotiations for a particular property. This can lead to a big feeling of “what just happened here?” after the negotiations.
Price creep doesn’t have to be devastating. Sometimes it just reflects a buyer’s shift to a more realistic understanding of what their home-buying dollar can get. Sometimes, though, price creep can lead buyers to overextend themselves on their mortgage, or foul up a home’s appraisal. Here are some suggestions from Tara at Trulia for keeping price creep under control in your own house hunt:
1. Run your own numbers. Traditionally, house hunters would save up for their down payment, work on their credit then go to a mortgage broker to ask them how much they could afford to spend – how high would the bank let them go. Smart buyers avoid problematic price creep by running the process in reverse, running their own monthly budget numbers before they ever meet with a mortgage broker then telling their mortgage pro what their own personal monthly housing cost maximum is.
This enables the mortgage pro to tell you what purchase price range will create a total monthly mortgage, tax and HOA payment that lines up with your budget. Many buyers who run their own numbers end up purchasing homes less costly than the upper limit the bank would set for them. Your mortgage broker might still go ahead and have the bank approve you for a higher loan limit, in order to allow you the leeway to inch your house hunt range or offer price point upward, if you decide to do that down the road.
Given the dynamics of the current market, it’s not a bad idea to ask your mortgage broker to provide you with a written set of loan scenarios at the outset of your house hunt. These scenarios should include the principal, interest, taxes, insurance and total monthly obligation that would correspond with 3 or even 4 price points, so that you can make informed, reasoned decisions about your house hunt price range(s) over time.
2. Start your house hunt lower than your top dollar. On today’s market, many areas are seeing homes sell (a) with multiple offers and (b) above the asking price. Ask any buyer who has ever fallen in love with a home then had to compete for it: the temptation to blow your budget to win a bidding war for your “dream home” is extremely tough to resist.
One way to set yourself up for success is to house hunt in lower price ranges, to start. This gives you the freedom to aggressively bid and even counteroffer if you find a home you love without overextending yourself, financially speaking.
This might seem like obvious advice, but it’s advice many a buyer resists. Some think they should get as much home as they can possibly eke out the dollars to afford. And most buyers overestimate their negotiation skills, pinning their hopes on the idea that they’ll be able to bargain their eventual home’s owner way down.
Your agent can help reality-check you on this score and set up a smart starting price range for your house hunt by showing you the data on list price-to-sale price ratios in your area. If homes generally sell for 15 or 25% over the asking price, you can use that information to back into a price range that will allow you to be a successful buyer/bidder without breaking your bank.
3. Have your mortgage pro do a last-minute budget check before you write. I’ve seen buyers do all sorts of things before they submit an offer, from saying a prayer to sleeping on it; to consulting an almanac, compass or feng shui chart. Whatever other elements you include in your pre-offer submission rituals, make sure you don’t miss this one: ask your mortgage pro to run a last-minute budget check on the precise purchase price you’re offering.
This allows her to give you a precise idea of:
- the monthly mortgage payment and property taxes
- combined with the precise HOA dues for that property (if applicable)
- and a narrower estimate of the dollar amount you’ll need to bring in for cash to close (down payment and closing costs), based on your estimated close date. (Note all close date and closing cost estimates are just that: estimates. They are never precise to the penny until closing day – and often, not even then – so don’t start spending your surplus savings until after you move in.)
You’ve probably received most of this information before, but it might have been for a lower price point – the price point at which you started your house hunt. Also, And this information allows you to do a final gut and budget check before you submit your offer – the sort of last-minute check that can keep you out of overspending territory.
4. Think of your house as the launch pad for the rest of your life. Your house is NOT your life. It doesn’t define who you are, nor is it the cornerstone of your value as a human being – no possession is. The home you are buying now should be put in its rightful place in your value system as the launch pad or backdrop for the rest of your life.
Keeping your home in this perspective can help you avoid overspending, as being “house poor” (spending so much on your mortgage that you cannot afford much else) will render you unable to afford the experiences that make up a rich life, like travel, entertaining friends and family members or other activities you and your family enjoy.
House poverty is also extremely stressful and dangerous, financially speaking. It often serves as a source of chronic anxiety, for those who live in it unless the prospect of large raises or other increases in income are realistically on the near-term horizon.
In the same vein, this perspective shift can remind you to avoid being so financially overextended on your mortgage that you can’t afford to do things like:
- make the fixes to the property that will make it an enjoyable place to live
- save and invest for the future
- handle unexpected expenses like medical bills and car breakdowns, interruptions in income and the other “emergencies” that are part of our daily lives.