The Process of Making An Offer On A Home
When you are ready to buy a house, making an offer is a big step. While you may have enjoyed the process of searching for a home, making an offer can be a more daunting task.
There are many steps in the process with legally binding consequences. Though your real estate agent or attorney will help you, it’s a good idea to understand the process before you begin.
We take a look at the steps involved when you make an offer on a house.
Get Pre-approved
Before you begin searching for your new home, you need to know how much you can afford to spend. A mortgage pre-approval from a lender shows you that they will finance your home purchase up to a certain amount.
This shows sellers that you are serious and will be able to move forward with the purchase if you decide to make an offer.
You can also get pre-qualified for a loan, but this isn’t as good. Pre-qualification is only an estimate of the amount you will be able to borrow and not a formal commitment from the lender.
Gather Required Documents and Funds for Lender
When you make an offer, you need to be ready for mortgage approval. The lender will need to check your finances during the underwriting process. You will need to provide documents to prove your income.
You need cash available for the earnest money deposit and have the down payment ready. If a family member has given you money for the down payment, you will also need to demonstrate that this money isn’t a loan and provide documentation of its origin.
Understand Your Budget and Decide How Much To Offer
When you have been pre-approved for a loan, you will have a better understanding of your budget. This allows you to narrow down your real estate search, saving you time and preventing you from falling in love with a home you can’t really afford.
Your real estate agent can create a comparative market analysis (CMA) to help you set an offer price strategy. With a better understanding of the home’s value, you can make the most of your budget.
Decide on the Offer Type
If you’re trying to buy a home in a hot market, a standard offer may not be your best option. Consider using an escalation clause, which increases the bid price when the seller receives better offers. This allows you to beat competing higher offers until your maximum budget is reached.
If there is a lot of buyer interest in the home, the seller might request the highest and best-looking offers. This encourages the potential buyers to give their best bid by a certain date. This speeds up the process for the seller and can lead to better offers while still leaving some room for negotiations.
It isn’t always the best-looking offer that wins; other things can also be important to the seller. Perhaps the seller needs to move quickly, or they prefer fewer contingencies. If you can be more flexible, you can make your offer more attractive to the seller.
How to Structure Escalation Clauses
The escalation clause should clearly explain when it will be triggered and what will happen. If there is a better bid, your offer increases by a certain amount or percentage. This will trigger again when your offer is beaten, up to your maximum stated cap.
Time limits can be set, limiting when the escalation clause can trigger. The clause can also require documentation of competing offers, so that you know it is genuine.
For example, you set a cap of $320,000 with offer increments of $2,000. Then you make an initial bid of $300,000, which is followed by a counteroffer of $305,000. When that happens, the escalation clause will trigger, meaning you make another offer for $307,000 automatically. But if someone else then bids $319,000, the escalation clause won’t trigger, and you will be out of the race.
Choose Your Contingencies Carefully When Making an Offer to the Seller
Common home buyer contingencies or clauses can be added to your offer that protect your interests during the purchase. Commonly used clauses relate to the home inspection, appraisal, and financing.
Inspection Contingencies
While there might not be any obvious problems with the home, a professional inspection could reveal something unexpected. The inspection contingency allows you to walk away from the purchase with your earnest money if repairs, lowering the price, or credits cannot be negotiated with the seller.
Appraisal Contingencies
Lenders usually require an appraisal to ensure the home’s value before purchase. The company does not want to loan more than the property is worth and risk losing money should the borrower default.
If the appraisal is lower than expected, an appraisal contingency will allow the borrower to back out if the price cannot be renegotiated. Perhaps there are some alternative financing options available that don’t require an appraisal. Another option for the borrower is to pay the difference, but if they don’t have the cash, triggering the contingency might be the best option.
Financing Contingencies
The financing contingency lets the borrower cancel their purchase contract if they do not secure the mortgage they need. This typically gives the borrower between 30 and 60 days to apply for the loan and get approval. If the financing falls through, this contingency allows them to back out.
The borrower is expected to work toward gaining the financing they need after the offer is accepted. This usually gives borrowers 5 days to submit their loan application after the seller accepts your offer. The borrower has to meet the mortgage lenders requirements and submit documents. If the contingency doesn’t give them enough time, they can ask for an extension, but the seller does not have to agree to this.
When to Waive Buyer Contingencies
Contingencies mostly benefit buyers, so if you want to make your offer more attractive to the seller, removing some of these obstacles can help. However, while fewer contingencies can improve your offer, there can be serious downsides.
You risk your earnest money if you do not want to continue with the purchase contract. If you choose to waive the inspection and contingency, you could be buying a home with serious and expensive problems.
Depending on your situation, it may be easier to give up some contingencies. If your finances are good, you can avoid a financing contingency. If the home is a new construction or if an inspection report is already available, perhaps you can waive the inspection contingency. Though whatever your situation, giving up contingencies isn’t completely risk-free.
When and How to Request Seller Repairs or Credits After Inspection
If the inspection report has highlighted issues, you can request the seller to make repairs. Such a request should be made within the inspection period, which may only be 10 business days after the offer was accepted. Alternatively, you can negotiate a price reduction or seller credit to cover the costs.
The biggest concern should be safety issues, structural problems, and major system failures. For older properties, wear and tear is to be expected and shouldn’t be a reason to request repairs.
Seller Concessions and Repair Negotiation Strategies
For sellers who are having trouble selling their home, offering concessions can be a way to attract more potential buyers. Seller concessions help reduce the buyer’s expenses and upfront costs, which makes the home more affordable.
If the inspection reveals some issues with the property, the seller can offer a credit instead of making the necessary repairs. This can save time and hassle for the seller and allows the buyer more control over the repairs being made.
What is the Right Amount of Earnest Money?
When you make an offer letter, offering earnest money shows the seller that you are serious. This good-faith deposit can be between 1% and 3% of the purchase price, although it may also be a fixed sum, and the amount can vary depending on the type of housing market. In a competitive seller’s market, buyers may be advised or asked by the seller to provide up to 10% of the purchase price.
This earnest money is paid when the seller accepts the offer, and this is deposited in an escrow account. If the purchase proceeds, the earnest money will be released at closing and can be applied to the down payment or closing costs.
If the home purchase doesn’t proceed as hoped, this earnest money can be released back to the buyer if contingencies cover the reason for this. If the buyer wants to back out of the contract without the protection of a contingency, this earnest money can be forfeited to the seller to cover their expenses.
Common Deal Killers
There are many things that can get in the way of a successful home purchase. Perhaps the inspection uncovers some serious issues like a failing septic system, structural problems, or a roof that needs a lot of attention.
There are also many things outside of the inspection that can end the deal. The home may not have a clear title, with outstanding loans against the property or ownership disputes. There can also be problems with local zoning laws and HOA regulations that cause the cancellation of the home sale.
Insurance and Escrow Requirements
Your mortgage broker will usually require you to have homeowners’ insurance to reduce their risk. This insurance covers damage to the home and should protect you against liability for injuries to others as well.
If you are buying with less than a 20% down payment, you can expect to have to pay mortgage insurance, depending on the type of loan. Mortgage insurance is paid monthly as part of your home loan payment. This usually remains payable until you have at least 20% equity in the home.
With FHA loans, this is slightly different. The FHA mortgage insurance premiums (MIP) require an upfront payment, and monthly payments will continue for the life of the loan in most cases.
How Rental or Duplex Plans Affect Offers
If you want to buy a duplex so that you can rent one of the units, there are more things to consider. FHA loans don’t allow buyers to purchase property solely as an investment, but it is acceptable if you are going to live in one of the units.
Income from the rental can help you qualify for the home loan, allowing approval for a larger mortgage and to make a great offer for the property. The FHA loan limits are based on median home prices in the county and increase based on the number of units.
When buying a rental property, the landlord needs to be familiar with local housing regulations and make sure the home is safe for tenants. They also need appropriate insurance and a rental agreement that ensures their interests are protected.
Seller Negotiation Tactics and Counteroffer Handling
Sellers should start by setting an asking price that is reasonable based on market analysis. While you might think you’ve set the perfect price, you need to be open to compromise to make sure the home doesn’t sit on the market for longer than necessary.
Even if you receive unfair offers, you should avoid emotional responses. Ask for advice from your real estate agent and make sure that they are fully aware of your priorities to help you successfully negotiate making a counteroffer on the sale.
Delivery Methods for Submitting an Offer
When you are happy with your offer, your buyer’s agent can prepare the documents to submit to the seller’s agent. Negotiations can begin after that, and then contracts can be signed.
Other methods of submitting offers are increasingly popular and allow faster processing and convenience. Buyers can receive documents via email and sign them electronically (e-Sign) if they agree to the terms.
There are also real estate software transaction platforms, created to make the process smoother. Offers can be created within the platform and updated as necessary. E-signatures can be used when an agreement is reached.
What Happens After Offer Acceptance?
When an offer is accepted, the earnest money deposit should be paid into an escrow account. The buyer will have a set amount of time, usually at least a week, to arrange a home inspection and meet other contingency requirements. If this all goes well, the contingencies can be lifted and the process moves closer to closing.
Timeline After the Purchase Offer
- Offer acceptance – 1 to 3 days
You should normally receive a reply from the seller within three days of making an offer.
- Inspection – about a week
The time you have to arrange the inspection.
- Appraisal – 1 to 2 weeks
It can take two weeks to have the home appraised.
- Underwriting – 10 to 15 days
Your financial information and property details are reviewed by your lender.
- Clear to close – one day
When the mortgage company has completed its checks, notification will be given to allow closing.
Post-Close Checklist
After closing, funds can be distributed from the buyer’s mortgage company to the seller’s bank account. Real estate agents will be paid, and closing costs will be distributed.
The title company can then record the change of deed with the local government office. This officially transfers ownership to the buyer. A record of the mortgage is also added to public records, indicating that the property serves as collateral for the home loan. The buyer should receive copies of these records.
Then the title company can issue title insurance and finalize the transfer. The buyer can then plan and prepare for moving into their dream home. The buyer should transfer utilities in good time, so that everything is ready for moving day.
Summing Up How To Make A Purchase Offer On A House: Mortgage & Real Estate Agent Advice
Having a clearer understanding of the stages involved when making an offer, for both the buyers and sellers, can make things easier. While real estate professionals will be there to guide you, being knowledgeable about the process makes it less intimidating.
