Homebuyers Are Increasingly Making This Dangerous Mistake

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Buying a home is a huge financial undertaking, and while there are benefits to owning property, there are drawbacks as well. When you own a home, you take on the responsibility of not just a mortgage, but of property taxes, insurance, maintenance, and repairs. And while the cost of most of these things is out of your hands (you can't prevent your property taxes from climbing, and in many cases, you can't avoid upkeep and repairs), the one thing you can control is how expensive of a home you purchase in the first place.

Today's homebuyers, though, aren't doing a good enough job of staying within their homebuying budgets. A good 38% exceeded their self-imposed limits over the past four years, according to a recent survey by real estate brokerage Owners.com. Not only that, but new owners exceeded their budgets by an average of $20,000 -- not a small amount.

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If you're planning to buy a home, it's crucial that you stick to the budget you set for yourself. Otherwise, you could wind up getting in over your head -- and risking your finances in the process.

The dangers of going overboard

Many homebuyers are loathe to settle for properties with flaws, and as such, would rather bust their budgets to buy homes that better align with their personal checklists and expectations. The problem with doing so, though, is that by overspending on a home, you're effectively running the risk that you won't be able to keep up with it.

As a general rule, your predictable housing costs should never exceed 30% of your take-home pay. By "predictable housing costs," we're talking about things like your mortgage payment, property tax bill, and homeowner's insurance. (And yes, the latter two can climb over time, but if you start off by keeping those three items to 30% of your income or less, you're in pretty good shape.)

Once you exceed that 30% threshold, your housing expenses can really start monopolizing an unhealthy amount of your income, especially since that 30% limit doesn't generally include things like maintenance and repairs. And when housing eats up too much of your earnings, you risk falling behind on other bills, thereby damaging your credit.

Another thing to remember is that as a homeowner, it's critical to have emergency savings. This way, if a major repair comes up out of the blue, you won't need to resort to credit card debt to cover it. If you buy a more expensive home than you can afford, though, then you may wind up spending more to cover your down payment. And that, in turn, could leave you with little to no cash reserves left over for unplanned expenses -- home-related or otherwise.

Buy smartly

If you're looking to buy a new home, set a budget for what you can afford initially, and pledge not to exceed it. If you can't find the right property at the price point you've established, reset some expectations. Decide that you're willing to buy in a year so you can save up more money to better afford what you really want. Or, see if it makes sense to expand your search to different neighborhoods. Moving 10 minutes outside your target zone could result in much lower housing prices.

One thing you shouldn't do, however, is settle for a home you know you ultimately won't be happy with just because it's in your price range. Remember, homes can always be updated and treated to cosmetic overhauls, but if you buy a 1,300-square-foot home on a tiny surrounding patch of land, no amount of money will turn that into a 2,800-square-foot space. Therefore, while you can buy a home with an outdated kitchen that's in your price range and upgrade that room once you've saved more, be careful about settling for things you can't ever change.

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