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First Time Home Buyer: How to Make an Offer?


First Time Home Buyer: How to Make an Offer?

Buying a house can be a stressful endeavor for anyone.   But, for first time home buyers, the thought of making an offer on a house for hundreds of thousands of dollars in a very competitive home buying environment, where even a slight delay can cost you the house of your dreams, the anxiety is enough to make you want to stay in your apartment.  If you are fortunate enough to find the house you would like to turn into your own little paradise, there are many unexpected issues you need to deal with just to be able to submit the offer to the seller of the property.

Several of these issues you can think through ahead of time in order to make the process more predictable.  As you step through these decisions, remember that most of the items are negotiable and if you don’t feel comfortable making the decision, it doesn’t hurt to walk away.

The first thing you have to consider is the amount of the offer.  Even before starting the process of looking at homes, it really helps to understand your monthly cash flow and how much of a mortgage payment you can afford.  Always remember that your monthly payment will include principal and interest  and may include  real estate taxes, home insurance and  private mortgage insurance (PMI), depending on the size of your down payment.    Planning for this ahead of time will give you more comfort in making an offer.

Once you have decided the amount of the offer you are going to make, there are a several items you need to address in order to complete the contract you will submit to the seller:

  1. Earnest money – This is the deposit the buyer is willing to put down in order for the seller to hold the property for the buyer. It is typically deposited into a trust account and held by a third party.  If the offer is accepted and the buyer decides to back out, the seller gets to keep this money.  An offer that includes earnest money shows the seller you are serious about buying the home.  You don’t have to put any earnest money down but the seller could be more inclined to accept an offer over another knowing they will at least get the earnest money if you back out.
  2. Home warranty – The buyer has the option of requesting the seller purchase a home warranty as part of their offer. A typical home warranty will provide protection against the mechanical failure of items like large appliances, water heaters, HVAC systems and pool equipment for a period of one year.  This is a common item found in many real estate contracts, but should not be considered a deal breaker if the seller declines to provide it as a home owner can purchase a one-year home warranty usually for less than $1000.
  3. Title insurance – This insurance protects the buyer from financial loss in the event there are defects in the title to the home. Title insurance for the buyer is optional, but in most cases is recommended.  The bank may also obtain their own title insurance policy, referred to as a “lender’s policy”, that is usually paid for by the buyer.
  4. Loan application – You must decide on the number of days during which you will be able to apply for and obtain a loan with a lender after the offer is accepted. This includes picking a selected lender along with giving the lender your “intent to proceed”.  In addition, you must also specify the number of days after the date of acceptance by which you will notify the seller that the loan has been approved.
  5. Specific additions – The buyer always has the option of attempting to negotiate items that are not a fixed part of the house into the contract. These include appliances, window treatments, and anything else that might not be a part of the home but you want to include in the purchase.  You also can request certain items be repaired as a contingency in the contract.  Maybe the carpet is in particularly bad shape in one of the bedrooms.  Including the replacement of this carpet as part of the contract is certainly possible but the seller is also free to make counter offers on such items.
  6. Inspection contingency – The buyer has the option to have the home inspected. You will need to include the number of days starting the day after the offer is accepted in which you will have all inspection related matters completed.
  7. Settlement charges – The buyer must decide on which settlement charges, if any, they want the seller to pay.  These can include points, closing costs, pre-paids, and any other fees imposed by the buyer’s lender.
  8. Closing date – This might be self-explanatory but you must negotiate a mutually acceptable closing date.
  9. Expiration – Since this is an offer “contract”, you want to set a date and time by which the seller has to respond in order to move the contract forward in a timely manner.

As itemized above, there are many issues to consider and negotiate besides just “making an offer” when buying a house.  Giving some thought to these issues before you find yourself having an overwhelming feeling of anxiety will make the experience much simpler.

Written by

Jimmy Stechschulte, CFA®

As a member of the Investment Committee, he performs investment research on both equity and fixed income products to help construct diversified portfolios for clients. Jimmy also meets with and assists clients with financial and retirement planning needs, estate planning, and tax planning issues.

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