Before Upping Your Bid for a Home, Ask Yourself These Questions First
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Here's your money briefing for Tuesday, May 18th. I'm J.R. Whalen for The Wall Street Journal. Some people in real estate say they've never seen a housing market like this before. Tight inventory is triggering fierce competition among buyers, many of whom are overbidding and stretching beyond what they've budgeted for.
it is going to be quite difficult to get the house at the price that you were hoping for. And you're going to be in a situation where you might be in a bidding war.
Without careful planning, overbidding on a home can wreak havoc on your personal finances, even if you're approved for a higher loan amount. But there are ways to make it work. Coming up, our reporter Deborah Acosta will be here to explain what prospective homebuyers should know before aggressively bidding on a house. That's after the break.
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Why are homebuyers stretching their budgets in today’s market?
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Home prices are at their highest level in 15 years. If you're looking to buy, you may be considering stretching beyond your budget to secure your piece of the American dream. But is that the right move? Here to talk about that decision and what goes into it is our personal finance reporter, Debra Acosta. Debra, thanks for being with us.
Thank you for having me, JR.
So Debra, walk us through the basic math here. What is the standard advice for making sure that you can afford a mortgage?
Sure. So a general rule of thumb is to spend only between a quarter and a third of your monthly gross income on your mortgage payment. So if you're looking at, let's say you make $100,000 a year, you should be spending around $2,340 a month on your mortgage. And it could be a little bit more, a little bit less, depending on what your financial goals are, including spending, paying off debts and saving for retirement, for example.
But given the current environment, there may be a lot of pressure on people to pay more for the home they want. And I suspect that a lot of people might think that, hey, if the bank offers them a bigger loan, then, you know, why not take it?
Sure. I mean, when I say a quarter and a third, I'm not including maintenance, taxes, and insurance, which are going to be built in. So if you're incorporating all of that, then it's really between 35% and 45% of your monthly gross income is what you should spend on your mortgage, which is quite a bit actually. And nowadays, mortgage brokers might give you up to 50% in a loan. So you might be able to qualify for... for a little bit more than that. And really, it depends on what your financial goals are, whether or not you should accept it. You would probably feel pretty stretched if you did go all the way and spent 50% of your monthly gross income on your mortgage. So really, it's up to you. You can go for it, but you will feel pretty tight when it comes to everything else that you might want to spend on.
So what are some things that people should keep in mind before going over budget on a home?
So one thing that you really want to make sure of right now in this hot market that we're in is that the house that you're buying is really one that you want to spend quite a few years in.
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