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For Your Life May 20, 2024

How to Prepare for a Bidding War When Buying a Home

Low inventory and high demand are creating sellers’ markets across the country. To break through and get your offer accepted, you may need to do a little upfront work and be prepared to negotiate during a bidding war.

Michael Bartels, a vice president and mortgage loan officer at Old National Bank, has worked in the mortgage lending industry for over 20 years. Below, he draws on his experience to share some tips on how you can put yourself in the best position possible. 

Get pre-qualified before looking at homes

A pre-qualification letter from a lender is an important starting point. 

You can use mortgage calculators to estimate how much you can afford to borrow. However, with a pre-qualification, you’ll send documents to a mortgage lender who will verify your identity, credit, savings and income. The lender can then tell you how much it’s willing to lend you based on your specific circumstances. 

A pre-qualification can give you a good estimate, and your loan officer will draft a letter that you can include with your offer.

If you aren’t pre-qualified, a seller might worry that you won’t be able to follow through on your offer because your mortgage application will be denied. 

“A pre-qualification letter is going to make your offer much more appealing,” says Bartels. “Honestly, a good real estate agent isn't likely to show you the house without the letter.” 

Pre-qualification can take a couple of hours or several days depending on the complexity, so find a mortgage lender and get started before investing too much time in browsing listings. 

Find a local lender that will own the process

You may be able to get a mortgage by working with a loan officer at a bank or non-bank lender. Or, by working with a mortgage broker who will shop your application around to different lenders. There are pros and cons to both options. 

“The mortgage broker has some ability to shop around. But ultimately, they’re sending the file to a completely separate company,” says Bartels. When you work with a loan officer from a local bank, your application stays with that lender. The loan officer also likely has existing relationships with local real estate agents and appraisers. 

“A lot of the time, the sellers love knowing that everyone who will work on the deal is local,” he adds. “I find that helps a lot with negotiating offers.”

Local lenders may also have access to certain types of mortgage loans that you can’t get if you work with a broker.

Calculate how much cash you need to close

In addition to the down payment, you need to prepare for closing costs, prepaid costs, inspections and mortgage reserves. A bidding war can drive up the offer price, which may also increase some of the associated expenses. 

You can work with your real estate agent and loan officer to learn more about how to estimate these costs. Try to determine the maximum amount of cash you have available for closing so you know how high you can go before negotiating. 

If family members might be willing to lend or give you money for the purchase, ask early on so you can include those funds in your calculations. Additionally, budget for related costs, such as moving expenses or new furniture.

Figure out how to increase your offer amount

Experienced real estate agents and loan officers can help you find creative ways to increase your offer, especially if you’re limited by the cash-at-close amount. 

“In terms of absorbing the upfront costs, there are definitely things you can do,” says Bartels. He says some common strategies are:

  • Offer more for the house. You may be able to ask the seller to cover some of your closing costs; however, in a seller's market, this might not be the best strategy. 

  • Pay off existing loans, such as an auto loan, to decrease your debt-to-income ratio and increase how much you can borrow. 

  • Accept a slightly higher interest rate and have the lender cover some of your closing costs.

Bartels adds that depending on where you’re buying and the type of mortgage you’re getting, there may also be grants or down payment assistance programs available. 

Local lenders may be more familiar with these types of assistance, and some even have additional programs. For example, the Old National Down Payment Assistance Program1 offers up to $15,000 for eligible borrowers who are buying a home in certain communities. 

Other ways to make your offer more appealing 

Increasing your offer price isn’t the only way to win a bidding war. Sometimes sellers will accept a lower price if they can be sure the sale will close quickly, and you could try to:

  • Learn more about the sellers. Having an inside scoop on what’s important to the sellers could help you position your offer. Your agent might be able to help, but you can also try to do your own research. 

  • Offer a larger earnest deposit. When your offer is accepted, you may need to send an earnest deposit to an escrow account. The sellers might be able to keep this money if you back out of the purchase. A larger earnest deposit could indicate your commitment to the purchase. 

  • Waive contingencies. You may also be able to reassure the seller by waiving some of the contingencies with your offer, such as an inspection or appraisal contingency. Bartels says buyers will sometimes hire an inspector to join them when they look at a home and then make an offer with waived inspection contingencies. 

Preparation can be the key to success

You want to be prepared for a bidding war and negotiations if you’re trying to buy a home in a hot market — or a hot home in a tepid market. 

“Ultimately, the more cash you have, the better you’re going to be,” says Bartels. However, you can assemble a top-notch team with an experienced real estate agent and a lender who knows the local market.

To get started, contact local mortgage expert from Old National Bank. We can work with you to get you pre-qualified, understand your budget and find creative ways to make your offer more appealing.

 

1. 1 Funds are limited; subject to availability. Amounts applicable in the eligible following counties (IL) Cook, DuPage, Grundy, Kane, Kendall, Lake, and Will; (MI) Kent and Washtenaw; (IN) Allen and Marion; (MN) Hennepin and Ramsey; (KY) Jefferson; and (WI) Dane and Milwaukee. Specific census tracts and other restrictions may apply. Program conditions subject to change. Old National reserves the right to discontinue program at any time.

 

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