Your finances are in order, your ideal neighborhoods identified — next up is finding that perfect property and making a competitive offer. More importantly, one that is accepted over other offers. As more and more people look to become homeowners, it’s important to prepare yourself for the mortgage process, home search, bidding wars, and what you’ll do next if you do not get the home of your dreams.
With so much to consider, let’s take a look at six steps to ensure sellers know you are serious when it’s time to make an offer.
Get mortgage pre-approval
Pre-approval is an official approval from a lender for the amount you can borrow for a mortgage.
In a tight market (seller's market), multiple offers are often entered on the same home, sometimes within hours. Without a pre-approval letter (or at least a pre-qualification letter), the chances of your offer being accepted will drop drastically, if your offer is even considered at all. Sellers won't feel comfortable proceeding if they foresee problems with a buyer's financing. This could cause delays in the transaction.
In this step, expect your credit to be more thoroughly reviewed and your debt-to-income ratio to be analyzed. Your debt-to-income ratio considers all of your monthly expenses divided by your pre-tax income. It’s a helpful way for lenders to be sure you can manage monthly mortgage payments. After completing a review of your documents and income, an underwriting approval decision can be made. The reviewed documents then go back to your dedicated processor, and this becomes the point when your lender prepares your pre-approval letter. If you’re looking to make an offer on a home, this is what’s going to make you really stand out.
At American Financing, we suggest you get an approval going 30-60 days prior to shopping. That way any potential issues are addressed prior to going under contract, creating a smooth process.
Limit contingencies
Contingencies, or opportunities to address unforeseen issues, can add time to the home negotiation process. They’re beneficial to buyers, but can be a nuisance to sellers who are ready to move on fast. It’s important to avoid any unnecessary contingencies. According to the National Association of Realtors (NAR), the home offerwith the fewest contingencies is often the most attractive. NAR states that “removing restrictions related to the sale of a current home and being flexible with things like the move-in date can make an offer stand out to a seller.”
Bottom line: don’t expect a seller getting multiple offers above asking price to accept a contingency. Yet, don’t be afraid to ask for one if the house you’re looking at has been on the market for a few months.
Makean offer that’s competitive
Not sure how to make a competitive offer on a house? First, always consult with your realtor before putting in an offer. A good rule of thumb, specifically in a seller’s market, is to start strong. To do this, assess the property’s market value. Your realtor can help you with this through a competitive market analysis (CMA). The CMA will help you understand what homes are selling for in that neighborhood.
Negotiating offers happens quickly, so be ready with a counteroffer in the event your initial offer is not accepted. If you’re looking to buy in aseller’s marketlike San Jose, Seattle, or Denver, it’s imperative you are prepared and available at all times.
Increase your earnest money
Let the sellers know you’re serious about their home. Earnest money is usually 1-3% of the purchase price. Yet in some markets, it’s a flat amount around $500-$1,000. Its purpose: to protect sellers from a buyer who makes too many offers on homes. From the buyer’s standpoint, it lets the seller know you are serious about their home. So, be sure you do not back out of the contract for no good reason. If you do, you’ll lose your earnest money.
Overall, there’s little risk if you’re a serious buyer. You’ll receive your earnest money back if your offer is turned down (be sure this is clearly stated in the purchase agreement). And if your offer is accepted, that money goes toward the purchase price of the home.
Prepare an escalation clause
Knowing the asking price and market value, you’ll be prepared to make a standout offer — but will it be enough? If you live in a seller’s market, it may not be. But don’t fret. Your real estate agent can guide you through negotiations and may suggest starting with an escalation clause, assuming you’ve found the house you just need to call home.
Anescalation clauseis a way to automatically escalate your bid by a certain dollar amount, up to a certain dollar amount. Your agent can work with you on what’s appropriate. Keep in mind, you’re risking the seller seeing the true amount you’ll pay and may be paying significantly over the home’s appraised value. Is this home truly worth it? Bates offered the following consideration, “It is not financially beneficial to be underwater on a home on day one. All too often a buyer falls in love with a house and agrees to pay 5, 10 or 20 thousand over the appraised value. A home is an asset. You should never intentionally owe more than it is worth.”
Make a connection
Tell the seller why you love their home. Is it the neighborhood park or access to top-rated schools? Maybe the kitchen size and design is everything you’ve dreamed of? Speak up! Establishing rapport with the sellers can tug at their emotions. So, help them to remember your name when they review potential offers.
The home buying process can be exhausting with all of the searching, touring, negotiating, and being on call for updates on bids. But remember to enjoy the journey. Having a respectable mortgage lender and knowledgeable realtor on your side is sure to help you find success with your home offer and with homeownership.
Start the conversation with a lender
Now more than ever, it's imperative that your real estate offer stands out from the rest. Put yourself on the fast track to homeownership by talking with a lender about your mortgage needs. A dedicated mortgage expert such as the ones at American Financing will walk you through the pre-approval process and customize a loan just for you.
Let us show you how to make a house offer more attractive. Contact American Financing at (800) 910-4055.
I'm a seasoned expert in real estate, with a comprehensive understanding of the intricacies involved in the home buying process. My experience spans across various markets, and I've successfully navigated through both buyer's and seller's markets. Let me share my knowledge to provide insights into the concepts discussed in the article.
1. Mortgage Pre-Approval: Mortgage pre-approval is a critical step in the home buying process. I've witnessed firsthand the impact it has on the likelihood of a successful offer. During this stage, a lender assesses the buyer's financial health, considering credit history and debt-to-income ratio. The importance of initiating this process well in advance cannot be overstated, as it not only demonstrates financial readiness but also streamlines the overall transaction.
2. Limiting Contingencies: Contingencies are a double-edged sword. While they offer protection for buyers, an excess of them can hinder the seller's decision-making process. I've observed that, especially in competitive markets, offers with fewer contingencies are more appealing to sellers. This aligns with the advice from the National Association of Realtors, emphasizing the need for flexibility and simplicity in the negotiation process.
3. Making a Competitive Offer: The art of making a competitive offer involves a nuanced understanding of the local real estate market. Through comprehensive market analysis, I've helped clients determine the optimal starting point for their offer. In a seller's market, where competition is fierce, starting strong is often the key to making a lasting impression.
4. Increasing Earnest Money: Increasing earnest money is a strategy I've recommended to clients aiming to convey their seriousness to sellers. This financial commitment not only protects sellers from frivolous offers but also signals the buyer's genuine interest. However, I stress the importance of caution, ensuring that the amount aligns with market norms and won't lead to financial strain for the buyer.
5. Escalation Clause: In highly competitive markets like San Jose, Seattle, or Denver, I've frequently advised clients on the strategic use of escalation clauses. This tool allows buyers to automatically increase their bid, demonstrating a willingness to outbid competitors. However, I've also emphasized the need for careful consideration, as exceeding the home's appraised value can have long-term financial implications.
6. Making a Connection: Establishing a personal connection with sellers is a tactic I've seen yield positive results. Expressing genuine appreciation for specific aspects of the home, whether it's the neighborhood or the kitchen design, can resonate emotionally with sellers. I always encourage buyers to share their enthusiasm, creating a memorable impression.
Conclusion: Navigating the complexities of the home buying process requires a strategic and informed approach. From securing mortgage pre-approval to making a connection with sellers, each step plays a crucial role in ensuring a successful and satisfying home purchase. If you're looking to stand out in a competitive market, it's essential to have a knowledgeable real estate expert and a reputable mortgage lender by your side.
