You’ve finally found your dream home and are ready to make an offer. But how exactly do you go about doing that? How much money should you offer? What information do you need?
Making a successful purchase offer is one of the most important steps in the homebuying process. We’re here to help guide you through what it takes to write, present and negotiate a home purchase with confidence.
- How to Make an Offer for a House
- How to Make a Cash Offer on a House
- How to Make a Cash Offer on a House FAQ
- Summary of Money’s How to Make an Offer on a House
How to make an offer for a house
A home purchase is the biggest expense you’re likely to face in your lifetime. Getting the offer details right is important to make sure you don’t either get in over your head or miss out on the perfect home, especially now that the housing market recovery has started. Before jumping into a purchase, however, you need to do some homework.
Figure out if you’re ready to become a homeowner
Buying a home is a big step. It means you’re taking on not only a large amount of debt but also all the costs associated with owning a home — things like maintenance, repairs, insurance, homeowner association fees and so on. You have to weigh the costs of ownership with the benefits you can derive from it.
For instance, if you’re currently renting, you know that rental costs have skyrocketed over the past two years. In some markets, buying a house is cheaper than renting, which means becoming a homeowner makes financial sense. You’ll also avoid having to go through tenant background checks which can make it hard to find a rental.
On the other hand, homeownership is one of the best ways to build up long-term wealth that can be passed onto future generations, but it takes time to accumulate. You need to ask yourself if buying a home is a good investment for you at this point in your life whether other types of investment make more sense. Once you’ve determined homeownership is right for you, you’re ready to take the next step.
Learn about the local housing market
While some believe that a housing recession is imminent, most housing market predictions call for a more balanced, if cooler, housing market over the next few years. This means buyers will have more time to look for the right home and be able to take their time before settling on a house.
Although the housing market is cooling and there’s no longer a buying frenzy, some areas can still be considered a seller’s market. Other neighborhoods are considered top housing markets for buyers this year because they still offer affordable housing options compared to other markets.
Make sure you know how competitive the local market is in terms of buyer competition, home prices and pace of sales. This will give you an idea of how aggressive you’ll need to be with your offer to get your dream home.
Have enough cash for upfront costs
While the majority of homebuyers finance most of a home sale, you still need to have some cash on hand.
You’ll need to make an earnest money deposit. This is a show of good faith letting the seller know you are serious about buying the home and is typically an amount equal to 1% to 3% of the home’s purchase price, although you can make a larger deposit as well. While earnest money is an initial deposit, it can be applied toward a down payment or closing costs when the sale closes.
A down payment will be required as well. This is a lump sum payment representing a percentage of the home’s sale price. While most mortgage lenders recommend a 20% down payment, many buyers struggle to meet that, especially after the typical down payment increased by 38% between 2020 and 2022. Keep in mind that you can buy a home with as little as 3% down (or 0% if you qualify for a VA loan).
Funding a down payment doesn’t have to be from your life savings. There are down payment assistance options you can consider or cash gifts from family. Some homebuyers opt to use money from their 401(k) to buy a house.
If you’re financing your purchase with a mortgage, you’ll also have to pay closing costs, which can include application and origination fees, among other expenses. Closing costs usually range from 2% to 6% of the total loan amount and are paid when the loan closes, although you can also roll them into the mortgage.
Calculate how much home you can afford, then set a budget
Before you even think of making an offer on a house, you need to know how much you can spend. To figure out how much you can actually spend on monthly mortgage payments, be sure you:
- Check your credit report and make sure you have the minimum credit score required to buy a house
- Go over your income, track your spending and see how much of your monthly income can be comfortably allocated toward a home loan
- Use a mortgage payment calculator to run through different home price and mortgage rate scenarios to get estimates of what your monthly payments will be
- Set a budget you’re comfortable with, then stick to it. It’s okay to leave a little wiggle room in case you need to negotiate, but set a maximum limit you won’t go over.
- Set a budget and estimated mortgage payment that leaves enough money to comfortably cover your other regular expenses
Note that if you have a high credit score, you’ll qualify for a lower interest rate and monthly payments, which will increase your affordability. However, you may still be able to buy a house with bad credit. You may just have to make a larger down payment or accept a higher interest rate. You can always refinance later if your score improves.
Line up your financing and get a mortgage preapproval
Unless you’re paying all cash, your first step is to shop around for a mortgage lender. Compare banks, mortgage brokers, credit unions and online lenders to get a wide variety of options. You’ll be surprised at how different lender rates and terms can be. Comparing the offers of at least three different lenders can lead to significant savings over time.
Once you’ve settled on a lender, get a mortgage preapproval. This can provide an advantage if you're buying a home in a competitive market where you may be involved in a bidding war with other buyers. Having a preapproval letter can:
- Allow you to make an immediate offer on a home
- Specify the maximum amount a buyer is qualified for
- Show the seller the deal is unlikely to fall through because of problems obtaining financing
If you’re approved for a mortgage loan, the lender will then issue a preapproval letter detailing the amount you qualify for, the interest rate and other loan details. Preapproval letters will usually be valid for 60 to 90 days, although some lenders can provide extensions.
Keep in mind that preapproval letters don’t guarantee a final loan approval if, for instance, the conditions under which you qualified changed or the home appraisal is higher than the amount you qualified for. It also doesn’t bind you to a specific lender — you can finish your financing with a different one.
Work with a real estate agent to help you navigate through the homebuying process
If you’ve already bought a home before you may feel comfortable handling a home purchase on your own. However, the know-how provided by an experienced real estate agent can be useful regardless of whether you’re looking to trade up from your current home or a first-time homebuyer, especially with the current housing market shift into more of a buyer’s market.
Your realtor will help you:
- Identify and tour properties that meet your needs
- Spot potential red flags in the home
- Determine the fair market value
- Establish a starting offer price
When choosing a real estate agent, interview at least three realtors before picking one. You want to feel comfortable with them and that they will represent your best interests in any negotiation with a seller's agent.
Compare similar properties to determine how much to offer
Explore neighborhoods that meet your criteria. Your realtor will help you line up home tours and alert you to open houses. It’s important to see the properties in person because you’ll get a better feel for the flow of the home and how it may fit your family’s needs.
Once you find a home you like, you want to make sure the list price is fair. Your real estate agent will help you determine this by making a comparative market analysis. This is a report comparing the sale prices of similar homes recently sold in the area to the home you want to buy.
The results, also known as comparables or ‘comps,’ should set a starting point for what your home offer will be.
Settle on the contingencies you want to include in your offer
Determining the home price is just one part of what makes up your purchase offer. The other part is the terms and conditions under which you’re willing to buy. These are called contingencies, and they can let you get out of a sales contract without penalty if certain conditions aren’t met.
These are the three most common types of contingencies included in home offers:
- Passing inspection contingency
- Appraisal contingency
- Financing contingency
There may be other contingencies you should consider as well. If your new home purchase is contingent upon the sale of your current home, for instance. Discuss all the conditions under which you are willing to buy with your real estate agent so they know what to include in your offer.
Submit a written offer, including conditions and contingencies
Once you’re ready to buy, you need to submit a written offer with the details of your purchase proposal. You can craft one on your own or your realtor can help you write it. Your agent will present the letter to the seller’s agent, who will then talk it over with their client.
Your offer letter should include the following information:
- Address of the for-sale property
- Your name and the name of all buyers who will appear on the title alongside you
- The amount you’re offering
- The contingencies that need to be met for the sale to go through
- Any concessions you are asking for, such as rate buydowns or home repairs
- Any furnishings or appliances you want to be included in the home purchase
- How much you’re putting down as an earnest money deposit
- A copy of the mortgage preapproval letter
- The loan closing date
- Your move-in date
- Deadline date for the seller to respond
Be prepared to be flexible and negotiate
Once you submit your offer, one of three things will happen. The seller will accept it as is, they’ll reject it outright, or they’ll make a counteroffer.
If your first offer is accepted outright, congratulations, you’re on your way to owning a new home. If the seller rejects your offer, you have two choices: Make a new offer or walk away. If a counteroffer is made, you can either accept it or make your own counteroffer. This is where the negotiations come into play and they can involve several different aspects of your offer:
- You may decide to increase your purchase offer
- If the seller is firm on price, they might be willing to grant concessions such as paying for some repairs or covering all or part of the closing costs
- The seller may need additional time to buy a new home. Offering a lease-back option or extended closing time may solve the problem
You may also consider submitting a handwritten letter detailing what makes you love the home and why you would be the perfect buyer. Some homeowners may be emotionally attached to their homes and knowing that the next owners will take as much care of it as they do can make your offer stand out.
Complete the purchase agreement and make an earnest money deposit
Once your offer is accepted, both you and the seller will sign a purchase agreement. This is a binding legal contract that details all the conditions under which the home sale is to take place, including information about the purchase price, contingencies, concessions and closing date.
At this point, you are required to make an earnest money deposit, which will be deposited into an escrow account with a third-party agent to hold until the homebuying process is completed. While the money is in escrow, neither you nor the seller can access it. Once the purchase process is complete and the closing has taken place, however, the escrow agent will disburse the funds to the appropriate parties.
Finish your mortgage application and schedule a home inspection
The final step in the offer process is to complete the mortgage application if you’re financing the home purchase. You’ll send your lender of choice a copy of the purchase agreement along with any other documentation they may require to finalize the loan.
Your lender will require an appraisal of the home’s value to make sure it’s worth the amount they are willing to lend you. If the home appraises for more than the purchase price, you won’t have a problem with the financing. However, if it appraises for less than the agreed-upon price, you will either have to negotiate a lower price with the seller or come up with additional cash to make up the difference.
If you're applying for an FHA or VA loan, the lender will also require you to do a home inspection to make sure there are no major issues with the property. Conventional loans don’t require this, but regardless of the type of loan you’re applying for, scheduling a home inspection is a good idea — it can identify issues that could be costly to repair or make the home unsafe.
After finalizing your financing and getting the inspection and appraisal reports, you’re ready to close on the home.
How to make a cash offer on a house
Most homebuyers finance a home purchase with a mortgage. Some buyers, however, can afford to buy a house with all cash, bypassing the lending process altogether. Here’s what you need to know if you are thinking of making an all-cash offer.
Steps for making a cash offer
Many of the initial steps will be identical to those you’ll need to take when financing.
- Get to know the housing market
- Determine how much house you can afford and set a budget
- Hire a real estate agent
- Tour homes and identify the property you want to buy
Once you’ve found the house you want to buy, the process changes a little. You still have to submit a written offer that includes all the information discussed above, but some of the contingencies become less important.
Since the sale won’t depend on being approved for a mortgage, you don’t need to include a financing contingency. If you are really in love with the home and want it no matter what, you can also skip the appraisal process.
You should still keep the inspection contingency, however, since this will give you a detailed report of any repairs or issues that may need to be addressed.
After submitting your offer, the seller can accept or reject it, or make a counteroffer, at which point you can decide to negotiate or walk away from the purchase.
If you agree on the terms, you’ll sign a purchase agreement, make an earnest money deposit, and set a closing date. Because you no longer need to get lender approval, the sale now becomes a cash transaction; all you need to do is sign the sales contract at closing and hand over a check.
There are advantages to making a cash offer on a home, but there are also downsides. Before making any type of offer, make sure a cash sale is the right choice for you.
The pros and cons of a cash offer on a house
- Fewer contingencies can make your offer more attractive to sellers
- The sale is less likely to fall through
- The closing is easier and faster
- No lender fees or interest payments that increase the cost of buying
- A seller may be more likely to accept a lower cash offer over a higher offer that relies on financing
- Making an all-cash offer can cut into savings and decrease liquidity
- You may be tempted to skip an appraisal and overpay
- Other investments, such as stocks and bonds, may provide higher returns
- You won't be able to deduct mortgage interest from your itemized taxes
How to beat a cash offer on a house
Cash offers can be hard to compete against in a tight housing market, though there are steps you can take to even out the playing field and make your offer more attractive. But some of these steps can have a downside, too. Make sure you consider all the alternatives before making an offer.
- Get a mortgage preapproval - this signals the lender that you have the financing and the sale is unlikely to fall through because of lack of funding
- Offer more than the asking price - overbidding the competition makes your offer stand out
- Make a larger earnest money deposit - the more earnest money you put down, the more serious about the purchase you appear
- Waive contingencies - dropping the appraisal and financing contingencies can make your offer more attractive to a seller
- Provide an appraisal gap clause - this means you are willing to pay any difference between your offer and the home’s appraised value
How to make an offer on a house FAQ
Can a seller back out of an accepted offer?
What is a cash offer on a house?
What are contingencies in real estate?
How to make an offer on a house without a realtor?
Summary of Money’s How to Make an Offer on a House
Buying a house is an exciting and nerve-wracking experience. Knowing local market conditions, being financially prepared and relying on the knowledge of an experienced real estate agent can make the process easier.
Having a clear understanding of how much house you can afford, the costs involved and how to use contingencies to help protect you from getting in over your head are also important parts of making an offer on a house. But a successful bid means you will be able to enjoy the benefits of homeownership for many years to come. These are the steps to making an offer on a house:
- Figure out if you’re ready to become a homeowner
- Learn about the local housing market
- Have enough cash for upfront costs
- Calculate how much home you can afford, then set a budget
- Line up your financing and get a mortgage preapproval
- Work with a real estate agent to help you navigate through the home buying process
- Compare similar properties to determine how much to offer
- Settle on the contingencies you want to include in your offer
- Submit a written offer, including conditions and contingencies
- Be prepared to be flexible and negotiate
- Complete the purchase agreement and make an earnest money deposit
- Finish your mortgage application and schedule a home inspection