How To Make an Offer on a House

Making an offer on a house is a significant step in your homeownership journey and the home-buying process. A big part of this step is figuring out how much money to offer for the property, but you’ll also determine the legal terms of your purchase. 

Your success in finding the right home for you rests upon the seller accepting your offer. You may have to restart the home-buying process if the seller declines your offer.

You might feel pressured to place an offer as soon as possible, especially in a hot market, but don’t rush before you’re ready. An offer also imposes legal obligations. To minimize your legal and financial risk, consult a real estate attorney about any legal concerns before making your offer. A lawyer can also help you evaluate the terms of your purchase agreement.

Deciding How Much To Offer

Making an offer on a house is difficult. If you bid too low, others may outbid you. If you bid too high, you risk overpaying.

To safely navigate these potential pitfalls, here are some things to keep in mind when making an offer on a house:

• How much house you can afford
• Seller’s asking price
• Price of a comparable home

Before you start house-hunting, you should determine your budget.

How Much House Can I Afford?

Most people, including first-time homebuyers, need a mortgage loan to buy a house. Some buyers also receive support from loved ones. You should know your bottom line before you start the process. Doing so will show real estate agents and prospective sellers you are serious.

You have a few choices to help you make this determination. These choices include, but are not limited to, the following:

• Affordability calculators
• Financial worksheets
• Mortgage preapproval
• Mortgage prequalification

Tools for Estimating Your Buying Power

Most banks and mortgage lenders offer basic affordability calculators on their websites. You can enter basic financial information, and the calculator will estimate how much you can borrow to buy a new home.

While this estimate can help you determine how much you can afford, it’s not a guarantee. The mortgage lender is not bound by the affordability calculator’s results. Online tools, including AI chatbots, may also calculate an estimate based on incomplete information of your finances. For those reasons, it’s not a good idea to fully trust these calculators to decide your homebuying budget.

Mortgage Loan Prequalification

Mortgage loan prequalification is a step up from the affordability calculator. Through prequalification, the mortgage lender determines your creditworthiness or ability to repay the home loan.

The lender will look at your financial information including, but not limited to, the following:

• Credit score and credit history (soft pull)
• Income
• Bank statements
• Work history

Mortgage Preapproval

Going into the house-hunting process with a preapproval letter places you in a strong position as you search for your dream home.

Through the preapproval process, the lender typically examines the following:

• Credit history (hard pull)
• Debt-to-income ratio (DTI)
• Employment history
• Bank statements

If the lender decides you are creditworthy, they will issue a preapproval letter. The exact terms and interest rate of the mortgage typically won’t be locked in until you secure financing for the specific home at closing. Yet, this letter will help you when it is time to make a purchase offer. 

Seller’s Asking Price

The seller’s list price is another factor to consider when making an offer. Here are a few things to consider when evaluating the seller’s asking or list price:

• Some sellers overprice their home to give themselves room to negotiate
• Some sellers price their homes according to pricing data from comparable homes sold in their local housing market
• Some sellers underprice their house in the hopes that it will sell fast or create a bidding war

Seller’s Market vs. Buyer’s Market

The economy’s health can make a massive difference in the competitiveness of the real estate market. Federal regulators set interest rates to keep the economy stable, which influences buyers’ decisions to borrow money.

When employment numbers are up and mortgage interest rates are low, as was the case in the decade after 2010, more buyers are looking for a home. It becomes a “seller’s market.” Home prices rise as buyers compete for a limited number of homes, and homes sell fast.

When the economy worsens, homeowners having financial issues may need to sell their houses. If more homes are on the market than buyers looking for homes, it’s a “buyer’s market.” Home prices may fall because buyers can walk away and make an offer on another house.

Evaluate Home Prices With a Real Estate Agent

A realtor or real estate agent can help you evaluate the asking price by doing a comparative market analysis. Real estate professionals are experts in their local market and can help you understand the nuances of a competitive market. They can also guide you through the home-buying process, from your home search to move-in day.

How To Make the Offer Letter

Once you determine your offer price, your next step is to finalize an offer letter. Your real estate professional can help you prepare the letter. Remember that your offer price may differ from the final purchase price.

Your offer letter should include the following:

• Name of the seller 
• Property address
• Amount of offer for purchase price
• Amount of down payment
• Earnest money deposit amount
• Any requested comps
• An escalation clause if you want to guard against being outbid

The seller may decline your first offer with a counteroffer, opening negotiations for a final purchase price. Keep the following in mind as you go through negotiations:

• Down payment
• Closing costs
• Possible renovation costs

Responding to Counteroffers

Sometimes, a seller won’t accept your offer outright but will instead provide you with a counteroffer that changes one or more of the following:

• Purchase price
• Closing date
• Other conditions you outlined in your offer

You have three choices when responding to a counteroffer:

• Accept
• Reject
• Counteroffer

Be sure to communicate a time limit for the seller’s response. No contract will form until both sides agree. Once you and the seller finalize the purchase price, you can enter into a purchase agreement.

Should I Make Multiple Offers on Different Homes?

Do not make concurrent offers on multiple homes. If you’ve lost out on several homes after being outbid, you may feel pressure to improve your odds. But if you only want to buy one house, stick to making one offer at a time.

In classic contract law, an accepted offer becomes a binding contract. If you make multiple offers that sellers accept at the same time, you risk a breach of contract lawsuit. Some realtors tell their clients not to worry about making multiple offers, but the truth is that you risk a lawsuit and the loss of your good faith deposit.

Purchase Agreement

The terms of your purchase agreement should reflect the final agreement between you and the seller. Before you enter the closing phase, you should fully understand these terms. While your real estate agent can explain the contract, only your real estate lawyer can provide legal advice to ensure the terms are in your interests.

Because home sales are often tenuous, you should consider a few contingency clauses to protect you if certain events occur. This can include negotiating over issues found during the home inspection. For example, an appraisal contingency protects you if the home’s appraised value is lower than the purchase price.

Review Your Homebuying Contract With a Lawyer

Your home purchase is one of the most significant decisions you will make. Making a successful offer is vital to the overall home-buying process, with legal implications. If you have legal questions about making an offer or buying a house, a real estate attorney can help. They are experts in real estate law and can offer sound legal advice.