20 Reasons Not to Bust Your Home-Buying Budget

When you're shopping for a house, it's tempting to buy the biggest and best place you can afford -- or even to stretch your budget a little. After all, your home is the place where you'll set down roots and spend a lot of your time. You want it to be a place you love.

Unfortunately, if you bust your home-buying budget by spending the maximum amount of money that's feasible, this could be a decision you come to regret. Here are 20 reasons why.

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Lenders want to make sure you can comfortably afford to repay your home loan. If you're pushing to buy a house you can't easily pay for, you may have difficulty finding a lender willing to approve you for a loan. Or you could find yourself forced into higher-risk borrowing options, such as interest-only or adjustable-rate loans.

You don't want to limit your loan options or find yourself rejected for a mortgage entirely after you have your heart set on an expensive property.

If lenders view you as a higher-risk borrower (because you're borrowing so much) you could end up being offered a loan only at a higher rate.

If stretching to buy a home leaves you with a jumbo mortgage (one exceeding loan limits set by Fannie Mae and Freddie Mac), you could also find yourself paying a higher interest rate. These loans tend to cost more than conforming loans since they can be harder to resell on the secondary market where Fannie and Freddie buy most loans.

Shopping around for a loan is key to getting the best mortgage rate. Unfortunately, if you're stretching to buy a home you can't afford, there may be just a few lenders willing to do business with you.

This could leave you with a lender that charges higher loan origination fees, that has a poor reputation for customer service, or that simply charges more than another would have if you'd met their qualifying requirements for loan approval.

If you're buying a more expensive home at the top of your budget, your down payment will also have to be higher. After all, 20% of $200,000 is just $40,000 while 20% of $300,000 is $60,000. It could be harder -- and take longer -- for you to be able to save up enough to afford the costlier property.

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As long as you pay them off each month, credit cards are a no-brainer for savvy Americans. They protect against fraud far better than debit cards, help raise your credit score, and can put hundreds (or thousands!) of dollars in rewards back in your pocket each year.

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If you're not able to save up a 20% down payment because you're buying a property that's actually a bit out of your budget, you could end up having to pay for private mortgage insurance (PMI). Lenders require PMI when you have too low of a down payment. The purpose is to protect them in case of foreclosure.

PMI can add to your monthly payment and can be expensive, typically costing between 0.5% and 1% of your loan's value. And, of course, if you've purchased an expensive home, the premiums are even higher.

ALSO READ: 3 Reasons Not to Buy a House Until You Have a 20% Down Payment

When you stretch your home-buying budget, your monthly payment will naturally be higher. You could have difficulty covering it along with your other expenses. This could set you up for stress every single month when you must figure out how to afford to pay your lender.

Borrowing more to buy a costlier home means that you'll increase the total cost of interest over time since you're paying interest on a larger loan balance. This means that over the course of your loan repayment period, more of your money will go to your lender instead of staying in your pocket.

If your payments are hard for you to afford, there's a greater chance that a day will come that you can't afford them.

If that happens, your lender could foreclose on your home. Foreclosure is incredibly damaging financially and can be very difficult to recover from.

ALSO READ: What Is a Foreclosure? | How Does Foreclosure Work?

When you save up an emergency fund, you should have three to six months of essential living expenses set aside. Obviously, your mortgage loan is an essential expense.

As a result, if you've stretched your budget to buy a home and made your monthly payments bigger, your emergency fund will have to be larger. If your mortgage payment is $2,000 a month instead of $1,000 a month and you save up six months of living expenses, you'd need an extra $6,000!

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When you buy a more expensive home, you aren't just raising your mortgage payment. You'll also owe higher property taxes as well.

Paying more money in property tax means you'll have even less money to keep for yourself -- on top of the extra you're paying on your mortgage loan. And while your mortgage will eventually be paid off, property taxes don't ever go away. When you hit retirement, your income will have to be higher even then if you plan to remain in your home just to cover your big property tax bill.

You'll also need insurance for your home -- both because your lender will require it and to protect against financial disaster.

Unfortunately, when you buy a more expensive home, it's more expensive to insure. That means you'll be looking at a higher mortgage payment, higher taxes and higher insurance costs thanks to the fact you stretched to buy a costlier house.

Both property taxes and mortgage interest can be tax deductible if you itemize on your taxes. However, there's a cap on the amount of state and local taxes -- abbreviated as SALT -- that you can deduct. And there's a maximum limit on the size of your mortgage if you want interest to be fully deductible.

If you're stretching your budget and buying a costlier home, there's a chance that you'll exceed the limits for the SALT deduction and for the mortgage interest deduction. This means you'll effectively pay even more for your home since the government won't subsidize the full cost.

A big, expensive home tends to come with expensive components to repair, and with more components that could potentially need repair. You'll have to pay much more for things like a new roof or new expensive appliances or new flooring.

Unfortunately, it will be even more challenging to pay these high maintenance and repair costs due to the fact that you've stretched to buy the home.

Lenders consider your debt-to-income ratio when you apply for all different kinds of loans, including personal loans and car loans.

If you've taken on a mortgage that's very large relative to your income, you could have difficulty getting approved for these other kinds of loans. That could be a big problem if you need to borrow to start a business or to buy a vehicle to get you to work.

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Once you've moved into your home, you'll want to make it a comfortable place to live -- and that means buying furniture. A larger home will necessitate more furniture, which means it'll be more expensive to buy everything you need.

And if you've busted your budget to afford to buy the home, you may be unable to afford the cost of your furnishings. You could find yourself living in an empty place wishing you'd bought less house and left yourself money for the things you need to fill it.

Closing costs generally add up to around 2% to 5% of the value of the home. The more expensive the house, the higher the closing costs will be. You'll need to come up with more money up front to pay these expenses, which is hard if you're really stretching to buy the home.

Alternatively, your lender may allow you to roll the closing costs into the loan, but that could mean making your loan balance even higher. This would raise your monthly payments, and leave you paying even more interest over time.

ALSO READ: Average Closing Costs in 2020: What Will You Pay?

When you get a mortgage, you may have the option to buy points. These cost 1% of your loan amount and reduce your interest rate by 0.25%. If you're going to stay in your house for a long time, it can make sense to buy points to make your monthly payments lower and to reduce total interest cost over time.

If you've bought a more expensive house, though, each point costs more since these points equal a percentage of your loan. And if you've stretched yourself thin to afford to buy the home, you might not be able to come up with the money to buy as many points as you'd like.

When you (and your lender) decide how much house to buy, you'll take your current income into account. If you've committed to a large mortgage payment, you really won't be able to afford a drop in income in order to still make the bills. And if you've stretched to buy your home, you're probably counting on your income going up in order for your payments to become more comfortable.

Unfortunately, if your interests or life circumstances change and you want to switch careers, you may be unable to do so if that would mean taking a pay cut. If you'd opted for a mortgage that was more comfortably within your budget, on the other hand, you'll have more flexibility in your job options.

Entry-level and lower-priced homes tend to sell more quickly because there's a larger pool of buyers who can afford the properties. If you've stretched to buy a home, chances are good many other would-be buyers will find that it's out of their price range. As a result, your home may be on the market for a longer time when you try to sell and you may struggle to get your asking price when you list your home.

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As long as you pay them off each month, credit cards are a no-brainer for savvy Americans. They protect against fraud far better than debit cards, help raise your credit score, and can put hundreds (or thousands!) of dollars in rewards back in your pocket each year.

But with so many cards out there, you need to choose wisely. This top-rated card offers the ability to pay 0% interest on purchases until late 2021, has some of the most generous cash back rewards we’ve ever seen (up to 5%!), and somehow still sports a $0 annual fee.

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If too much of your monthly money is going toward your mortgage, you may not be able to save for retirement, vacations, or other big purchases. You don't want to bust your budget only to end up house poor and unable to do anything else that you've dreamed of.

If you want to end up in a house you're happy with and with plenty of money to accomplish other life goals, opt for a house that's comfortably within your budget.

While most experts recommend keeping total housing costs below 30% of income, you may want to be even more conservative and cap your costs at 20% or 25% so you'll have the confidence of knowing that your housing costs are affordable both now and in the future.