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Today's housing market can feel like a dream killer.
Rising mortgage rates, high home prices and a shortage of properties for sale deliver a one-two-three punch.
If you've been knocked out of one too many deals and need a timeout, here's how to regroup and keep the homeownership dream alive.
Give yourself a break
Given the rise in home prices and interest rates, the monthly mortgage payment for a median-priced single-family home with a 10% down payment has jumped by about $800 since January, according to a June 2022 National Association of Realtors press release.
It's OK to hit pause if you're frazzled to the point that you can't think clearly or are simply priced out.
"If it doesn't feel right to you … step away and give yourself some breathing room," says Catalina Franco-Cicero, a certified financial planner with Tobias Financial Advisors in Plantation, Florida. "It's OK to do that."
But stepping back doesn't mean giving up.
"One thing we tell people with any goal that you have is that there's a big difference between 'no' and 'not yet,'" says Nathaniel Moore, a certified financial planner and president of Agape Planning Partners in Fresno, California.
Strengthen your finances
View the break as an opportunity to get your finances in even better shape.
Budget like a homeowner
Use a mortgage calculator to estimate a monthly mortgage payment, including estimated property taxes and home insurance. Then add utilities plus 20% of the monthly mortgage for unexpected maintenance and repairs, Moore suggests. Subtract your rent payment from that amount and set aside the rest in a high-yield savings account.
"That way, if and when you can get in the home, you don't have sticker shock or you're not house-rich and cash-poor because you didn't account for the other expenses," Moore says.
He likens the transition to a relay race.
"You want to have a smooth baton handoff, from the 'renter you' to the 'homeowner you.' If you're not ready to walk in that house and afford the ancillary costs of living there, that's when the baton fumbles and drops," he says. "You want to get to the place where the rental person is running at the same speed as the homeownership person so when the baton is handed off it's a smooth transition."
When you're ready to buy, you can add that extra money you've socked away to your down payment, which will help you make stronger offers and may qualify you for better mortgage rates.
"Nobody can truly predict interest rates nor inflation, nor the appreciation rate of homes in a relatively short period of time," Eric Lefkowitz, president and chief operating officer of Motto Mortgage Mint in San Diego, said via email. "But we can be certain that buyers should be saving for strong down payment options. This will ensure they can get the best available interest rate when the time comes."
Pay down debt
Paying down credit cards and other debt will improve two measurements: your credit score and your debt-to-income ratio, or DTI. Both are key factors that lenders consider when deciding whether you qualify and at what rate.
A good DTI — the percentage of gross monthly income that goes toward debt — is generally under 36%. The lower the better.
Your credit score is based in part on credit utilization, the percentage of available credit used. Shrinking your debt will lower credit utilization and help your score. Meanwhile, keep making on-time payments to preserve good credit.
"It's going to give you a better mortgage rate and more options," says Deb Gillard, a real estate agent with RE/MAX Venture in Owatonna, Minnesota.
Avoid optional big expenses
Resist the temptation to vent your frustration in a spending splurge, whether it's running up a credit card balance or buying a new car when the old one suffices.
"That's the last thing you want to do when you're taking this pause," Gillard says.
Another enticement may be to move to a nicer apartment. But stay put if you can, advises real estate broker Peggy Pratt, who leads the Pratt Properties Team of Century 21 North East in the Boston area. Paying the security deposit and other moving expenses could cut into savings for a down payment.
Reevaluate your wants and needs
This is a good time to look at the big picture.
"People need to do some soul searching to say, 'What am I looking for in a home?'" Moore says.
Given home prices and mortgage rates, you may need to adjust your filters. You may need to shop for homes in a different neighborhood or buy something smaller than originally imagined. If the aim is to buy a starter home, build equity and upgrade in a few years, then that flexibility may pay off.
"Homeownership is a step-by-step opportunity," Lefkowitz said. "You are not committing to stay in a home forever."
If you could work elsewhere, another option you might consider is relocating to a less-expensive housing market, Franco-Cicero says. That's a big decision. Taking a pause can give you time to research the quality of life and cost of living in other locations and weigh whether you want to live somewhere else.
Keep in touch with your agent, lender
Besides fine-tuning finances and reevaluating goals, keep in touch with experts you trust who can watch the market and bring you back in when you're ready, Lefkowitz said.
"This includes a strong Realtor and mortgage professional," he said. "Together, that partnership can keep the buyers’ best interest top of mind and be ready to pounce on an excellent property when it becomes available."
Let them know if you can make a bigger down payment, for instance. Keep your agent updated on when you might be ready to jump back into the market and the types of homes and areas you're willing to consider.
Pratt says she counsels clients to maintain realistic expectations and not give up.
"Hang in there," she says. "Something will come."