Purchase power: Know your true max

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Q: My wife and I were approved to buy a home up to $400,000, but we knew that we couldn’t actually afford the monthly payment on that much. So, we started out looking at homes in the $200,000 range. Over the months, we realized that we would have to offer quite a bit more than the asking price to get in. And so many of the properties we were seeing were in really bad shape — so bad that we couldn’t afford to fix them up if we did get them. So we decided to look in the $250,000 range, but even after offering $30,000-$40,000 over asking, we still weren’t getting anything.

Now we’re looking up in the low $300,000s — we’re starting to see fewer offers on the properties and better places, but I’m concerned by this trend, and I fear that we’re in danger of overextending ourselves. How should we proceed?