Preapproved buyers are often tempted to shop for homes that are just within reach of the mortgage allowance approved by their lender. However, real estate pros say it might be wiser for buyers to set themselves a limit below the maximum amount allowed by their lender.
In other words, they recommend buyers look at homes perhaps $5,000 to $10,000, or even lower than their maximum approved price range. They say with today’s housing market being so competitive, it’s practically a given that buyers will need room to up their bid to compete with other offers.
“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,” said Lori Ozley, a manager with Birmingham HomeBuyers in Birmingham, Ala., in an interview with realtor.com. “If you look at homes for sale 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 Survey.