Buying a home in a tight market? Here is one tactic that could work.
There's a reason buyers are eager to purchase homes these days. Mortgage rates are at all-time lows, and if you purchase a home today, you could lock in a super-affordable monthly payment.
There's just one problem: Housing inventory is so limited that you may have a hard time getting an offer accepted. In fact, homes on the market today commonly end up in bidding wars, where buyers have to one-up each other on the price. The frustrating thing in that scenario is you could make an offer above a seller's asking price and still have it rejected.
That said, there are things you can do to increase your chances of getting your offer accepted. One idea is to pay for a home in cash instead of getting a mortgage. That's sure to expedite the closing process, which is a good thing for sellers. But let's be realistic -- how many of us can really afford to buy a home outright?
Another tactic is to get pre-approved for a mortgage. That sends the message you're a serious buyer whose home loan is likely to come through (though it's technically not guaranteed). But the problem here is that getting pre-approved is something other buyers might think about, too.
Still, there's one final tactic you could employ that may increase your chances of landing a home in today's tight market -- offering a higher earnest deposit.
It pays to be generous with earnest money
Earnest money is the deposit you pay to a seller when you make an offer on a home. That money goes into a special escrow account and stays there until your transaction is complete. If you attempt to back out of the deal for a reason your purchase contract doesn't allow for, the seller is allowed to keep your earnest deposit.
Here's how that might work: Normally, a real estate contract will include a clause allowing the buyer to back out of a deal if a home inspection reveals problems the seller won't fix. In that case, you wouldn't lose your earnest money for not completing the sale. But if you were to enter into a purchase contract and then find a better home two weeks later, backing out of the first deal would give your seller the right to keep your earnest money.
Normally, an earnest deposit is around 1% to 5% of the cost of the home you're buying. For a $300,000 home, for example, you'd put down $3,000 to $15,000. But if you want to give yourself an edge in today's market, you could consider putting down an even higher deposit -- say, 6% to 8%. That tells your seller you really want to see your contract through.
Keep in mind that if your purchase goes off without a hitch, your earnest money will simply be removed from its escrow account and applied to your down payment. But if you're willing to fork over a more generous sum up front, it could be just the thing to get a seller to say yes.
Give yourself an edge
Many prospective homebuyers have been frustrated with their lack of success in getting an offer accepted. If that's been your experience, consider upping your earnest deposit the next time you see a home you want to buy. It could make a world of a difference.
Ready to get started? Connect with a First Midwest Lender today.