by Maurie Backman | Updated July 19, 2021 - First published on Sept. 29, 2020
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Here's how to get a leg up on the competition.
If you read the news, you’ve probably heard that now is a great time to apply for a mortgage. With historically low mortgage rates, you have the opportunity to lock in a great deal. You could enjoy affordable housing payments for many years to come.
But buying a home right now isn't as easy as it may seem. The reason? Limited inventory.
Many sellers don’t want to sell their homes during the pandemic. As a result, there aren't many properties available for buyers to choose from. In fact, many buyers are finding themselves in a situation where they need to outbid one another in order to get an offer on a home accepted -- even if that means paying well above a seller's asking price. And Redfin reports that around 55% of home sales were subject to bidding wars in August.
If you're looking to buy in the near term, you may find that you, too, are forced to enter a bidding war -- whether you want to or not. And here are three strategies you can use to come out victorious in that scenario.
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Getting preapproved for a mortgage isn't the same thing as getting an official offer from a lender, but it's a step in the right direction. A preapproval letter states that a lender has reviewed your finances and has determined that you qualify for a specific loan amount. Presenting a preapproval letter during a bidding war sends a message that you're not only a serious buyer, but a qualified buyer -- one who's less likely to encounter trouble getting a mortgage. And that could sway a seller to accept your offer over someone else's.
Maybe your seller will push for a fast closing because he or she needs to move right away. Or maybe the opposite will happen: Your seller may want to delay your closing so his or her children can finish up their school semester in their current district. No matter the circumstances, being as flexible as possible on a closing date could help you win a bidding war. Try talking to your landlord to extend your lease on a month-to-month basis. Or, if you're attempting to sell a home and purchase a new one simultaneously, try talking to your home’s buyers to work out a flexible arrangement.
When making an offer on a home, it's common practice to offer something called “earnest money.” That’s a nonrefundable deposit you provide to your seller to show that you're serious about moving forward with your purchase agreement. Usually, that deposit is anywhere from 1% to 5% of the cost of the home you're buying. But to come out ahead in a bidding war situation, it pays to offer up an even higher deposit (if you can swing it). A hefty deposit will show your seller that you really want the home -- and you’re also in a good position to afford it.
Your earnest money deposit is not the same thing as your home down payment. An earnest money deposit protects your seller. It’s compensation for them, just in case you decide to back out of the purchase without a justified reason (a justified reason might be, for example, problems revealed during a home inspection). Your down payment is what you'll provide to your mortgage lender when you go to close on your home loan. The earnest deposit can be applied to your down payment or closing costs when the time comes to finalize your loan.
Bidding wars aren't for the faint of heart. But in today's housing market, they're extremely commonplace. If you're hoping to buy a home this year, prepare for a bit of a battle -- but also put yourself in the strongest position to come out a winner.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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