Over the last few years, a housing shortage and the demand for new homes have skyrocketed, causing an increase in prices. In some cases, a bidding war takes place, which could make securing your dream home difficult. A bidding war occurs when more than one buyer makes an offer on a home, and several counteroffers ensue. These intense bidding wars can cause frustration for homebuyers looking to purchase a new property. Fortunately, there are some things you can do. If you are ready to buy a home, read on to discover some vital tips to help you win a bidding war to get the house you really want.

Buying a House in a Seller’s Market

The COVID-19 pandemic has sparked a frantic seller’s market in America. This seller’s market has caused real estate prices to go up significantly. As of February 2022, the median home price in America was a whopping $392,000, up over 12 percent from the previous year. Even homes that were once considered difficult to sell are now flying off the market due to bidding wars. Not only are houses getting more expensive, but mortgage rates are rising, too. The latest data shows that the average mortgage rate for a 30-year fixed loan is 5.25%, distinctly higher than in the past two years. Due to a shortage of available, affordable housing, it’s not surprising that bidding wars are becoming more and more intense.

The process of buying a house is already stressful, and taking part in bidding wars only makes the transaction more overwhelming. Purchasing a home can take a serious emotional and mental toll on homebuyers. Since a home is one of the biggest purchases you’ll ever make, it’s not surprising that it can create many emotions. When the market is tough, these emotions can be even more difficult to cope with. You can expect to feel a range of emotions, including excitement, nervousness, and disappointment if you happen to lose out on the home of your dreams. It’s important to learn how to manage your emotions and remember that there are a few ways you can win a bidding war in order to snag your dream home.

Tips for Winning a Bidding War

If you’ve found the home of your dreams, here are some tips to help you win the bidding war.

Make a Great Offer

Of course, making a great offer is one of the best ways to win a bidding war. When you outbid the competition, the seller will likely accept your offer, especially in a busy seller’s market. Before making an extremely high offer, make sure that it’s within your budget. Talk to your Realtor to learn how to make an offer on a house so you find a good balance between winning the bid and avoiding overpaying for the home. If you pay too much for a home, you’ll end up “house poor” later. This can cause financial stress and difficulties later, so always make sure you bid smartly.

Get Pre-Approved

Having a pre-approval in your hand is another way to win a bidding war. A pre-approval document from your lender shows sellers that you’re already qualified to buy a home and that you’re serious about your offer. A pre-approval means that you’re financially qualified to be approved for a mortgage loan. This is as close as you can get to securing a loan without a purchase contract. The lender will run your credit and have you fill out a mortgage application. Use the pre-approval letter to help you win a bid on a home you love.

Add an Escalation Clause

What is an escalation clause, and how can it help you buy your dream home? An escalation clause is a special language added to a purchase offer that will automatically increase your bid amount by a certain number as you compete against other bidders. The bid will increase until the offer reaches the maximum price that you’re willing to pay, and it only applies when there are competing offers on a property. Sit down with your realtor and develop an escalation clause that will fit your budget and your home-buying strategy.

Waive Contingencies

In a normal market, buyers may add contingencies to a contract, such as a clear home inspection or a specific timeframe to close. However, many bidders opt to add a contingency waiver to their contract in a seller’s market. This waiver can be beneficial since it makes the home selling process easier for both parties and can encourage sellers to accept your offer over other bidders during a bidding war. However, contingency waivers also come with some risks. For example, you may end up needing to make costly repairs that you didn’t know about if you waived a home appraisal or inspection. You could also create an appraisal gap that will make your mortgage more difficult to approve.

Write a Personal Letter to the Seller

Buying and selling a home is a very personal transaction. Consider writing a handwritten personal letter to your seller explaining why the property is so important to you and your family. A homebuyer’s letter may help you compete in a bidding war since it could convince the seller that you’re the best person to move into the home. Remember to keep the letter positive and explain why the property is so important to you and your loved ones. Don’t let your real estate agent write the letter for you. Instead, make the letter as personal as possible so that it creates an emotional response in the seller.

Consider Making an All-Cash Offer

If you decide to make an all-cash offer, you have a much higher chance of accepting your bid. Paying for a home in cash allows you and the seller to avoid additional fees like realtor commission and other closing costs. Since making an all-cash offer saves time, it’s very appealing to sellers who want to sell their property as fast as possible. It also helps you avoid a lengthy and intense underwriting process. The underwriting process is what most buyers need to go through when applying for a mortgage loan, leaving them at the mercy of the bank or mortgage broker.

Don’t Skip the Home Inspection

Some buyers choose to skip the home inspection in order to win a bid on a home. However, doing this can create a serious risk for you if you decide not to get one. You could end up with a severe problem later, such as a damaged roof, outdated electrical system, or leaky plumbing. If you’re concerned about time, keep your home inspector on speed dial and have them do an inspection as soon as possible before you decide to make an offer. A home inspection will cover important components like the roof, foundation, plumbing, appliances, and electrical systems to start.

How much house can I afford?

Before you get involved in a bidding war, it’s important to know how much house you can afford. While a seller asks, “how much is my house worth?” you should be asking yourself how much you can or should pay for a home. Here are some tips and guidelines to help you determine just how much house and how much of a mortgage you can qualify for and pay for.

  • Annual income: Consider the amount of your annual income after taxes. This will help you determine how much of your income you can afford to put towards housing costs.
  • Total monthly debt: Lenders look at your debt-to-income ratio, and you should, too. Examine your current total monthly debt and look for ways to cut back or save money so you can put it toward buying a new home instead.
  • Down payment amount: Most loans require a minimum of 3% down payment, while others can be as high as 20%. Make sure that you have enough money saved for a down payment before you start shopping for a home.
  • Calculate your costs: Use an online mortgage calculator to help you determine how much home you can afford. You can find calculators on websites like Smart Asset, where you enter information like your location, income, monthly debt, and credit score. Wells Fargo also has a mortgage affordability calculator you can use to help you determine the maximum bidding price you should offer. Talk to your bank or a mortgage broker if you need more help deciding how much house you can afford.

Getting involved in a bidding war is stressful, but that doesn’t mean that you have to give up on the house of your dreams. Use these tips to ensure that you’ll come out on top when you bid on a home. With some determination and knowledge, you can start to look for your next home in confidence, so you’re able to move into the house you’ve always wanted.