How to make a winning offer on your dream house

In a nutshell

There's more to making a winning offer on a home than just meeting the asking price.

• Experts say finding out what the seller needs the most can help buyers lock in their dream home.
• This could be a short closing time or a long closing time, or some wiggle room on major appliances they want to take from the home.
• Mortgage preapproval is another must when it comes to making a winning offer because it signals that you’re prepared to buy right away.
• Most of all, buyers need to be willing to negotiate on important terms if they want to get to the closing table.

Before you make an offer

There are numerous steps you'll need to take before you write an offer on the home of your dreams.

Assess your finances and credit

First and foremost, make sure your finances are in order and you’re ready to buy a property.

This means checking your credit score to ensure it's high enough to qualify for a mortgage, figuring out how much of a down payment you can afford and making sure your other debts are within an acceptable range. To qualify for a mortgage, you will need:

• Minimum credit score: You'll need a credit score of at least 620 to qualify for a conventional mortgage. However, FHA loans for first-time homebuyers require a minimum credit score of 580 with a 3.5% down payment or a minimum score of 500 if you put 10% down.
• Down payment of at least 3% to 5%: Conventional home loans require a down payment of 3% or 5% at a minimum, whereas FHA loans require a minimum down payment of 3.5%. Note that FHA loans require mortgage insurance regardless, but that you'll pay private mortgage insurance (PMI) on a conventional mortgage if your down payment is less than 20%.
• Acceptable debt-to-income (DTI) ratio: Lenders want to make sure your other debts are at a reasonable level, so they prefer buyers to have a debt-to-income (DTI) ratio of 50% or less. A DTI lower than that can also increase your approval odds.

Get preapproved for a mortgage

Getting preapproved for a mortgage is often necessary to secure your dream home. This is for two reasons. One is speed: Getting preapproved means you can write an offer the minute you find the home you want to buy. The other is that preapproval shows sellers you are financially ready to purchase their property, so they’ll be more likely to accept your offer.

How do you get preapproved for a mortgage? Start the process by comparing mortgage rates across the best mortgage companies online and in your area. Once you find the right lender, you can work toward preapproval by filling out a loan application and providing the lender with all the requested documentation. This can include:

• Full name, address and birth date.
• Social Security number.
• Pay stubs.
• Bank statements.
• Tax documents.
• Investment account statements.
• Proof of other assets.
• List of monthly debts.

Once you submit the information, a lender will send you a preapproval letter that tells (approximately) how large a mortgage they are willing to lend you. You should include this letter when you make an offer on a house, because it proves that you can afford the price you’re offering.

Adie Kriegstein, a licensed real estate agent with Compass in New York City, says that including proof of funds and a preapproval letter are crucial when writing up a winning offer. However, she says to keep in mind a preapproval letter holds far more clout than a prequalification letter.

While these terms are often used interchangeably, prequalification is a less formal process that is mostly used to estimate how much house you can afford. With that in mind, make sure you take steps to get preapproved for a mortgage and have a preapproval letter to show for it.

Find a real estate agent

Once your finances are ready and you have a preapproval letter in hand, you'll want to make sure you have a real estate agent who is ready to work for you. This step is important since a real estate agent serves many functions, from taking you to visit homes in person to helping you draft an offer that is ultimately accepted by a seller.

Fort Lauderdale real estate agent Whitney Dutton says you can research agents online by checking their reviews and looking at their past sales history. "A good agent will save you time, money and reduce your risk on possibly one of the largest purchases of your life," said Dutton.

Five steps to making a winning offer

With your preapproval letter in hand and a qualified real estate agent working on your behalf, you're ready to write an offer on a home. There are numerous considerations to keep in mind at this point, from how much money to offer to which contingencies to include. Here's an overview of the major steps involved in writing an offer:

Step 1: Decide how much to offer

Figuring out how much to offer on a home you want isn't always easy, especially since you'll want to offer just enough to secure the home without paying more than you have to. Important considerations to keep in mind as you figure out how much to offer include:

• Comparable homes in the area: Your real estate agent will help you complete a market analysis that compares the home you want to buy to other similar homes in the area. This analysis will help you determine if the home is priced high, low or just right, and you'll use this information to write up a fair offer for the property.
• Time on the market: Homes that have lingered on the market for a while may ultimately fetch a lower sales price, whereas homes that hit the market within the last few days could demand a premium.
• Market conditions: A seller's market with fierce competition for available homes will likely require a more competitive offer, whereas homes in a buyer's market may have more room for negotiation.
• Upgrades required: Figure out how much you would need to spend on the home to make it livable. Homes that need considerable upgrades and repairs may come with more negotiation room on the sales price.

Maureen McDermut, a realtor with Sotheby's International in Montecito, California, adds that it can help to know the sellers’ specific needs. Knowing whether they're hoping to close quickly or need extra time may make your offer more competitive. Your real estate agent should be able to query the seller's agent about these details. Once you find out what the sellers actually need, you can work some of these items into your initial offer where it makes sense for you as a buyer, says McDermut. "For example, if you need immediate occupancy, but the sellers need 30 days of occupancy, you can factor that into your decision and your offer price," she said.

Step 2: Decide how much earnest money to include

Earnest money is the amount of money you agree to put down on a home purchase as part of your offer. This money acts as a deposit on a home and is deposited in an escrow account. If an offer is accepted, it goes to the seller. If the offer falls through, it goes back to the buyer.

While the average earnest money amount is typically between 1% to 3% of the home purchase price ($4,000 to $12,000 on a home worth $400,000) competitive markets may see earnest money deposits as high as 10%. If you're unsure of how much earnest money to put down in your offer, a qualified real estate agent with their finger on the pulse of the local real estate market should be able to help.

Step 3: Choose contingencies to include

Most offers on a home include a few different contingencies that can derail the sale if something goes awry. Common contingencies are mortgage approvals or the buyer having to sell their existing home before they can close. Individuals can also write up offer contingencies for home inspections or a home having to be appraised for a certain amount before the sale can close.

While you may need to include certain contingencies to be able to purchase the home in the first place (i.e., having to sell your home first), Dutton says shortening or removing as many contingencies as possible can help secure a winning bid for a home. In a seller's market, you may even want to remove or shorten the inspection contingency or make the inspection component of the offer as short and sweet as possible.

"This can be done risk-free if you have your inspector ready to go including a list of contractors like electricians, pest control, roofers and plumbers," he said. "A shorter inspection period will make your offer very competitive and reduce a lot of risk of the seller taking the property off the market."

Step 4: Write a house offer letter

Once everything for the home purchase is in order, you will sit down with your real estate agent and write an offer for the home you want to buy. Your agent will likely start the process with their own template letter you fill out together, although this can be customized.

Regardless, a written offer on a home will include the following:

• Address of the property you hope to purchase.
• Your name and the name of other buyers purchasing the home with you.
• Sales price you are offering for the home.
• Contingencies you need to meet before the sale moves forward.
• Seller concessions you're asking for, such as money toward buyer closing costs or repairs to the home.
• Items you want included in the sale, such as appliances, window treatments or furniture.
• Your earnest money amount.
• Mortgage preapproval letter.
• The date you prefer to close on the loan and property.
• The date you want to take possession of the property.
• Deadline for the seller of the home to respond to your offer.

Step 5: Negotiate price and terms

Once you make your offer on a dream home, several different scenarios can come into play. The seller might:

• Accept your offer as it is.
• Make a counteroffer.
• Reject or ignore your offer.

If the seller accepts your offer, you can work with your real estate agent on the next steps, including signing the sales contract and setting up inspections and an appraisal of the home. If the seller ignores your offer or rejects it outright, you can write up another stronger offer or walk away and wait until another property you love comes along.

If the seller writes a counteroffer, this means they want to negotiate on some of the conditions of your initial offer. They may ask for a higher sales price, a different closing date, the removal of some contingencies on your offer or all of the above.

Only you can decide whether to agree to the seller’s counteroffer or if you want to counteroffer again to get a better deal. Your real estate agent can help you navigate this part of the sale, whether you opt to negotiate more or accept the seller's counteroffer so you can move forward.

The AP Buyline roundup

Knowing how to make a successful offer on a property is important, but there's a lot more to buying a home. For example, it could take years to save up the down payment you need for this major purchase, or you might need to spend some time building or improving your credit score before you start your home search.

You may even have to live in a few different places before you know what your dream home actually looks like or where in the country you want to live. As long as you keep your eye on the prize, continually work on your finances and keep your credit score in great shape, you'll continue moving closer to the home of your dreams.

Frequently asked questions (FAQs)

What is the rule of thumb for making an offer on a house?

Because housing markets vary widely across the country, there are no general rules that apply in every scenario. The most important points of a winning offer include a fair offer price, as few contingencies as possible while still protecting the buyer and a willingness to negotiate on some terms.

Do sellers usually accept the first offer?

It depends. A seller may accept the first offer they receive if they believe it's fair and reasonable. They may also wait for additional offers if they believe they can negotiate a higher offer price or more favorable terms.

What is a realistic first offer on a house?

A realistic first offer on a home can vary based on factors like the type of market and the condition of the home. An experienced real estate agent can help you determine how much to offer and what other details to include.

How soon after seeing a house should you make an offer?

You can make an offer on a home any time after viewing. Some buyers might make an offer immediately after seeing a home for the first time, whereas others may prefer to sleep on it or see multiple homes before they make a decision.