Buying a home is a team sport, and that’s especially true when buyers are facing the kinds of affordability challenges they are now. Volatile interest rates and tough competition for a limited supply of homes are posing unique issues for home shoppers. If you’ve been writing offer after offer — even competitive offers over asking price — and still not getting anywhere, then it could be time to change tactics.
Strategies tied to mortgage products and seller incentives can help buyers, even in situations involving cash buyers or shoppers offering above list price. Here’s an idea about the kinds of adjustments to offers or financing that can make the difference between getting the keys or attending yet another open house.
Offer a partial appraisal waiver
An appraisal establishes the current value of a home, and is used by lenders to determine how much they’re willing to lend buyers for a given home. Buyers who make an offer on a house usually include an appraisal contingency that lets them cancel the deal without a penalty if the house doesn’t appraise for the agreed-upon price.
Buyers in competitive markets can be tempted to waive appraisals, but doing so could require them to bring more money to the table at closing if there’s a gap between the price they offered on a home and what an expert appraiser thinks it’s worth. This is because a mortgage is tied to what the appraiser determines the home is worth. Anything over that amount is the buyer’s upfront responsibility.
Instead of waiving an appraisal altogether, some people agree to pay a specified amount over the negotiated sales price if there’s a gap between the asking price and the appraised value. That way, the buyer can still write a competitive offer, but not to the point of putting themselves at risk of having to come to the table with a big check — or losing their earnest money.
Show sellers you’re serious with a “time off market” fee
In a market where it’s common for buyers to lose a home to a competitor who is offering over asking price, there’s an option that could, in some cases, be just as attractive to sellers and potentially less expensive. It’s called a time off market fee.
When buyers make an offer on a home, they typically put up earnest money — a relatively small amount that can be refunded if certain conditions aren’t met.
With a “time off market” fee or TOM, however, the seller keeps the money regardless of whether the deal closes. It’s paid to them for accepting the buyers’ offer. A TOM fee in place of earnest money can be more attractive to a seller than an offer over the asking price, especially if the offer would result in an appraisal gap, where the sales price is more than what an appraiser determines a house is worth in the current market.
Pay a lender for a lower interest rate over the life of the loan
Buying “mortgage points,” also known as discount points or simply points, from a lender can help reduce the monthly payment on a home. Mortgage points are essentially prepaid interest that is paid at closing in exchange for a lower interest rate over the life of the loan. Each point typically costs 1% of the total loan amount. The more points you buy, the lower the interest rate.
One point generally reduces the interest rate by a specific percentage, often 0.25%. For example, if a buyer applies for a $300,000 mortgage and decides to buy one point, they would pay $3,000 (1% of $300,000) and receive a reduction of 0.25% on their interest rate.
Buyers considering this strategy should consider how long they plan to stay in the home, how much they’ll save by reducing the interest rate and how much money they’ll have to spend upfront. A loan officer or financial advisor can help determine whether buying points makes sense for you.
Pay a lender to temporarily lower your interest rate
Another way to lower a monthly mortgage payment is to cut the interest rate for the first one to three years of the loan.
The most common mortgage product to do that is a 2/1 buydown. It allows a borrower to “buy” a lower interest rate for the first two years of their mortgage by prepaying a portion of the interest on the loan. For example, a borrower who applies for a 30-year, fixed rate mortgage at 7% can lower the mortgage to 5% the first year and 6% the second year by pre-paying the interest they would have paid at the 7% rate for those two years. The mortgage then reverts to 7% in the third year.
It’s important to note that the buydown cost is separate from other closing costs, and can be paid for by the seller, builder or buyer. Buyers who adopt this strategy either plan on interest rates dropping so they can refinance or on their incomes increasing over the two years that the lower rate is in effect.
Loan officers can provide accurate and up-to-date information on the cost of a 2/1 buydown, and provide specific details based on different loan amounts, interest rates and loan terms.
Bump up the offer price in exchange for a lower, seller-subsidized mortgage rate
This tactic is most effective when negotiating with a seller whose house is not selling as quickly as expected or when the market favors buyers.
In effect, the buyer increases the loan amount so they don’t have to pay out-of-pocket to get a lower rate. The result: a lower monthly payment and the ability to spread the cost of the buydown over the life of the loan.
The 2/1 buydown temporarily lowers the mortgage payment for two years while buying points lowers payments over the life of the loan.
Ask for a lender credit to buy down the mortgage rate
This is where professional relationships are especially important. Agents who work closely with lender partners can help buyers make a better, more competitive offer in neck-in-neck situations, he says. While some of these scenarios may seem complicated, an experienced agent and loan officer can talk through options.
Consider new construction
While buying new construction isn’t a competitive offer strategy, it provides one avenue for more affordable mortgage rates. The added bonus: in certain markets there is less competition, no bidding wars and clients get a brand new home.
While builders might hold firm on the asking price so as not to affect prices on homes in the rest of the development, they may be more willing to negotiate around concessions and financing.
Whether you’re in the hunt for a home or you’re still in the dreaming phase, it can help to familiarize yourself with strategies on making competitive offers in a sellers market, so that when the time is right, you know your options — be sure to talk to your agent to know for sure. Every tactic comes with some degree of risk, and it’s critical that buyers understand tradeoffs and consequences and how the tactics fit into the bigger picture.