First Time Homebuyer's Guide to Calculating the Reservation Price

Making the right offer is one of the most important part of the home buying process. Experts advise all homebuyers to find out home prices in an area and set their own reservation price, or the maximum price they are willing to pay for a home. A reservation price actually helps homebuyers in negotiating with the seller and stay within their budget when making an offer.

Barron's 'Smart Consumer Guide to Home Buying' states that buyers typically reduce or discount their offer price to create some allowance for negotiations. How much the discount is will largely depend on market conditions and the homebuyer's desire to acquire the home.

Here is a basic process for calculating your reservation price so you can negotiate the best price for your dream home:

1. Calculate how much you can afford to pay monthly. Write down the amount you are willing to allocate for housing costs per month.

2. Calculate your tax and insurance expense. Use the following suggestions from Barron's 'Smart Consumer Guide to Home Buying' when calculating your tax and insurance costs. Use a rate of .68 for areas with relatively high tax and insurance. If an area has relatively cheap tax and insurance rates, use a factor of .85. Lastly, you can just use the standard .75 to do a rough estimate. Multiply the rate applicable to your area by the amount in the first step to arrive at your affordable loan principal and interest payment.

3. Calculate your loan term and interest rate. Record your loan term and interest rate in years. Use the loan payment tables to locate the payment applicable to each loan term and interest rate.

4. Calculate your total loan amount. This will also be found in the loan payment table; you may also obtain this from your mortgage lender.

5. Add your cash on hand for the down payment. This will give you a final calculation of the total amount available to you for purchasing a home.

After completing the calculation in Step 5, you can compare it to Step 1 and see what the difference is. This will give you your negotiating range that you can use when making your offer. If the amount in Step 1 is higher than Step 5, you may be able to secure an offer by bidding a higher price than the seller is offering. If the amount in Step 1 is lower than Step 5, you'll need to focus on bringing the final price down to a more affordable range.

Calculating your reservation price is an important part of the homebuying process and can help you negotiate the best possible deal for your situation and get the home you want. Consider using the above calculations for each home you are considering so you have the confidence to overbid or negotiate for a lower price with your budget in mind.

Using online is one of the fastest ways to find Homes for sale in Minnesota. Using the MN MLS Listings is one of the best resources for locating properties by price, neighborhood, and other criteria.