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One of the most important elements of the home buying process involves making the right offer for your home. Experts encourage all homebuyers to take the time to research prices in the area and create their own reservation price, or the highest price they are willing to pay for the home. A reservation price helps you to bid more effectively and stay within your budget, making it easier to negotiate with the seller or seller’s agent when it comes to making the offer.

Barron’s ‘Smart Consumer Guide to Home Buying’ explains that it is customary for buyers to discount their offering price to create some negotiating room when making the offer; there is no rule on how much this discount needs to be, but it will depend largely on market conditions and how much you really like the home.

Below is the basic process for calculating reservation price to help you in making your offer and negotiating for the home you are eyeing.

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 tax and insurance costs. Barron’s ‘Smart Consumer Guide to Home Buying’ offers the following suggestions for calculating tax and insurance rates. Use a factor of .68 for areas with high tax and insurance costs; .85 if tax and insurance is relatively inexpensive; or use the standard .75 for a rough estimate. Multiplying this rate by the amount in Step 1 will give you your affordable loan P&I payment.

3. Compute for your loan term and interest rate. Write down the loan term and interest rate yearly. Locate the appropriate payment from the loan payment tables applicable to each loan term and interest rate.

4. Compute for your total loan amount. This information can also be found in the loan payment table or you can just ask your mortgage lender for the total amount.

5. Add your cash available for the down payment. This will give you a final figure of the amount you can afford to pay for the home.

You then have to compare the calculations you made on Step 1 with the amount on Step 5. The difference between the two will give you your negotiating range when making an offer. If the amount in Step 1 is larger than the amount in Step 5, you can offer a higher price for a home to secure the bid. If the reverse is true then you need to negotiate to bring down the final price into the range that you can afford.

Figuring out your reservation price will help you in identifying your negotiation options to obtain best possible deal. Use the above calculations for each home you consider buying so that you can negotiate with the confidence that you are dealing within your budget.

Homebuyers looking for houses for sale in Minnesota for sale can go online and search for properties by price, location and neighborhood by using the Minnesota MLS listings to locate properties throughout the state.