How to Negotiate When Buying a Home
Learn more about the art of purchasing a home. Negotiating when you buy a home can save you thousands of dollars.
Learn more about the art of purchasing a home. Negotiating when you buy a home can save you thousands of dollars.
Negotiations for your home should begin the moment you find the home you want to move into. When you are ready to commit, your realtor will reach out on your behalf and submit an offer. Even if you are not involved directly with negotiations, the process can save you thousands of dollars, so it’s important to know where you have room to negotiate.
The mortgage market can determine your position at the negotiation table. In a seller’s market, you might be competing against other offers, and this could make negotiations more difficult for the buyer. You will need to consult with your realtor and first consider what will be your bargaining position. The strategy is important with negotiations, and your realtor should be able to help with this.
No matter how you choose to approach negotiations, you should understand that haggling is a risk. That is why it is important you know what you are getting yourself into and all the bargaining tactics at your disposal.
Contingencies are important if you want to change your mind. It is important that you lay these out in your purchase offer, so be sure to clarify what kind of contingencies you want to include in the contract with your realtor. This way if something goes wrong, you will not have to forfeit your entire earnest deposit. Some examples of contingencies can be an appraisal, the sale of your current home, or inspection. Sometimes you can meet a seller halfway by offering to move up these contingencies. This will move the closing date up, and closing escrow sooner will make the seller very happy.
If you are a buyer asking a seller to pay for some of the closing costs you would normally pay, you are asking the seller to make a concession. A concession can also be a repair which may be required by an appraiser and should be completed and inspected prior to closing. In some cases, minor repairs required by the appraiser can be escrowed and completed and inspected after closing. You might have multiple items you are going to use to either negotiate a better price or improve the value of your purchase. Therefore, it is a good idea to know what concessions you might be able to ask for.
In a buyer’s market, the seller will have trouble getting their house sold. The seller may also be willing to make concessions for the buyer if they are in a hurry to sell their house and do not have many buyers lined up. If it is a seller’s market and there are many potential buyers lined up willing to pay full asking price, asking the seller to pay for some of the closing costs could lose you the house. Talk to your real estate agent to get their opinion before asking a seller to make a concession.
You will want to be strategic if you make a proposal for seller concessions. The best way to negotiate seller-financing concessions is to find out what is important to them. For instance, if the seller is looking to close the sale as quickly as possible, they may be willing to pay a certain amount of the closing costs if you can close on the house quickly.
You should also be specific when making proposals for seller financing concessions. For instance, you can ask them to pay for the loan origination fee or discount points and offer a flexible move-in date to give them more time to move out of the house.
If you ask the seller if they would be willing to raise the price of the house, this would increase your loan amount as long as the value is supported by the increase in price. This essentially gives the seller the funds to use for paying your closing costs with no out of pocket expense from the seller.
Similarly, if most bids for the house are under the sale price, you could offer to pay the full sale price in exchange for the seller paying the closing costs. While seller concessions can include paying for closing costs, you can also ask for other seller concessions instead. For instance, you could request the refrigerator and stove to be included in the sale of the home. However, be aware of asking your seller for too many things. If you ask the seller to include appliances that they were not planning on originally including and you are asking them to pay a portion of your closing costs, they might want to make a deal with another buyer.
Before you ask the seller to pay for a portion of the closing costs, it is important to know that there are restrictions on how much the seller is allowed to pay. Fannie Mae and Freddie Mac, not your lender, set these rules so they are non-negotiable.
For conventional loans that are investment properties, the seller can contribute a maximum of 2% towards costs. For conventional loans where the house is your main residence or second home, the maximum seller contribution depends on how large your down payment is.
Because FHA loans and USDA loans are meant to help Americans become homeowners, they give leniency to buyers when it comes to closing costs. FHA and USDA loans allow the seller to contribute up to 6% of the sales price towards the buyer’s closing costs.
While no down payment is required for VA loans, closing costs still need to be paid. VA restricts the veteran from paying certain fees and the lender or seller may have to pay for the fees that the veteran cannot pay. With VA loans there is no limit to the closing costs that the seller can pay. Those taking out a VA loan have the option of getting seller or lender credits to help cover closing costs.
VA also allows the seller to pay sales concessions. A seller concession is anything of value added to the transaction by the builder or seller for which the buyer pays nothing additional and which the seller is not customarily expected or required to pay or provide. Seller concessions do not include payment of the buyer’s closing costs or payment of points as appropriate to the market.
Any seller concession or combination of concessions, which exceeds four percent of the established reasonable value of the property, is considered excessive, and unacceptable for VA-guaranteed loans. Do not include normal discount points and payment of the buyer’s closing costs in total concessions for determining whether concessions exceed the four percent limit.
Seller concessions include, but are not limited to, the following:
The buyer can negotiate with the seller on closing costs, but also with the lender. While most closing costs are not negotiable, you can reasonably negotiate some closing costs with your lender:
Discount points can be used to buy down the interest rate that your lender is currently offering. Discount points are not a requirement but it can provide you with the benefit of a better interest rate. This can also be used for the lender to pay closing costs that you don’t quite have the funds to pay for. If you plan to own the house for five years or more, it will likely be in your best interest to pay some discount points for lower payments.
The loan origination fee, or mortgage points, can be negotiated. If your lender wants to remain competitive, they will be open to negotiating this fee. If you are a high-risk borrower though, this fee could be more difficult to negotiate.
Lender fees are fees charged by financial institutions for processing and funding a loan. They can include underwriting, processing fees, a credit report fee, and an appraisal fee. Lender fees are items payable in connection with a loan and contribute to the total amount of the borrower’s costs.
These fees are not always negotiable. You can request that the seller pay some or all of these fees.
If you are a low-to-moderate income borrower, you may qualify for down payment and closing cost assistance programs. Closing cost assistance often comes as a grant or deferred forgivable second mortgage that you will not have to pay back if you have followed the grant’s stipulations. It’s possible that one of those stipulations will require you to live in the home you purchase for three to five or more years, and that the house is not sold or refinanced during that time.
Now that you know all about closing costs and your options, here is what to do:
If closing costs are a concern, bring them up early with your lender when applying for the loan. Your lender wants you to be able to close on the house and will help you go over your options, including closing cost assistance programs.
If it was tough to get an offer accepted on a house with steep competition, you may not have much room for negotiation with your seller.
If you are in a good place to be making some negotiations on closing costs with the seller, look at how much the seller could legally put towards your closing costs based on your mortgage type.
You will want to look at the fees your lender is charging ,what the seller is charging and including the sale of the house, and if applicable how much your real estate agent is expecting in commissions if you are also selling your current home.
It is understood, then, that negotiating the price of a house can be ten times as terrifying. Not to worry, though: If you are not familiar with the market, you will have someone there to guide you and help you get the best possible deal – your real estate agent. You can certainly negotiate with your seller yourself to lower the cost of a house, but that is a bit risky, especially when you have a better alternative (using your agent) available.
Negotiations in the home buying process are largely dependent on the state of the local market. Fortunately, there are ways to negotiate the purchase price of your home. Here are a few ways you can stay ahead of the curve and ensure you are getting the absolute best possible price for your new home.
If you are serious about buying a home, you need to be serious about your offers. Offering significantly below asking will not accomplish anything; not only can it possibly harm your relationship with the seller by insulting both them and their home, but it will probably not get you the house either. Research the property and determine if the seller priced it fairly. If it is, offer just slightly less than the listing price. To make a negotiation work, you have to convince a seller that you are a serious buyer.
Has your seller picked up a new job in a new city and is looking for a quick move, or are they retiring and downsizing their home and in no hurry? If they are looking to move in the immediate future, they may be more willing to bargain with you. If they are unwilling to share this information (especially if their agent has cautioned them against it), you may be able to figure it out by sharing an initial offer. If they refuse to knock some dollars off the purchase price, they probably are not in any rush to move.
Depending on what the market state is, your negotiation strategy should differ greatly. In a buyer’s market, you are given all the power. Unless your seller does not have to move immediately, you are able to get more from them concessions-wise. Bargaining a lower price will be easier on your part because they do not have a wide range of buyers running each other over to buy their home. If your local market is like this, then ask for anything and everything you want – within reason.
In a seller’s market, things for you will not be nearly as easy. In this type of market, sellers typically have the pick of the litter when it comes to whom to sell their home to. Do not stick contingencies or extra demands into your offer (i.e., asking for the seller’s stainless steel appliances). Keep it simple. Your agent will also probably advise you to act quickly on a house you want to secure the best price. If you are not already pre-approved for a loan, you might be risking letting a good deal slip away.
In a balanced market, a market that does not sway in favor of buyer nor seller, there is less motivation for either party to close deals quickly. Be warned, though: taking too long to negotiate the price on your house can result in another buyer stealing it out from under you. To discover details about current market conditions, contact an On Q Mortgage Consultant today!.
By leaving all the face-to-face communication to your agent, not only will you be able to avoid making critical mistakes, but you will also be able to avoid looking too enthusiastic about the house.
Looking dispassionate about a potential home is the best thing you can do, especially if there are not multiple competing offers from other buyers. Appearing and acting indifferent about a home gives you an advantage in the negotiation process, as it illustrates that you are willing to walk away from a deal if it doesn’t suit your wants and needs. Keeping yourself out of direct contact with the seller will prevent you from possibly breaking this air of detachment.
Sometimes a home will require repairs. Question your realtor about any flaws you see in the property and attend the home inspection yourself so you can gain a better idea about the specifics of the home.
In some cases, we recommend you hire additional inspectors to check the plumbing and foundation. If you discover you will have to do expensive repairs you might want to include that as a concession in the contract, either have the seller’s pay it or have them lower the asking price to compensate for it.
If you are buying and not selling, realtor commissions are not something you will have to worry about. If you are selling a house and buying one at the same time using the same agent, you can request a discount on their commission. While not technically a closing cost, the seller can negotiate realtor commissions to help with the out-of-pocket costs that come with closing on a mortgage.
If you are asking the seller to make concessions and you do not want to lose the house, work with your seller to make sure you are meeting them in the middle. Likewise, do not try to cut your realtor’s commission unreasonably if you want to keep your real estate agent on your side.
Occasionally it pays to be bold, but it is a risk. Follow the guide above and you will be able to get the best deal possible, but if the deal falls through that does not mean you should give up. It is difficult to know exactly what the future will hold. Maybe you are going to find another home that is an upgraded version of the house you wanted to purchase. Simply because it did not work out does not mean that it is over. The only thing that is important is that you get up, dust yourself off, and try again.