For first-time homebuyers, saving up for a down payment or taking on another loan to buy a house can be all but impossible. But those aren’t the only big challenges to buying a house. Here’s how competing against buyers who can afford not to use a mortgage, risk having to pay for unexpected repairs after making a deal, or simply offer more than the highest amount you’re willing to pay can mean more barriers for first-time homebuyers.

Photo by are you my rik? on Flickr.

Recently, the Washington Post reported that home prices around DC reached their highest levels in ten years thanks in part to low inventory, which means more bidders for fewer houses. And the low end of the market— the part within reach for many first-time buyers— is the most competitive.

Before my wife and I bought in East Silver Spring last March, I felt like we’d never be able to save enough for our first house. Saving for a down payment—budgeting every penny, turning down dinners out with friends, and moving further away from work and public transportation for cheaper rent—was daunting. Where we once thought that saving enough money was the only major hurdle to owning our own home, we soon discovered that the down payment was only the beginning.

You don’t have to save 20 percent, but you do have to compete against those who have more cash on hand

A number of mortgage options exist for people like us who have good credit and a decent income, but who see a 20 percent down payment as an impossibility due to high rent and a lot of student loans.

Starting our search in Hyattsville, we knew we would be up against people making all-cash offers— in other words, waiving their “mortgage contingency” and telling a seller they could pay the purchase price without getting a loan from a bank.

Photo by Violette79 on Flickr.

All-cash offers are appealing to the seller for three reasons. First, the seller doesn’t have to worry about the buyer getting turned down for a mortgage. Second, the seller doesn’t have to worry about the house appraising for less than the amount of the offer, which would cause the bank to reject the sale price. Third, with no loan for a bank to underwrite, buyers can close more quickly.

Though recent data show the proportion of all-cash offers has decreased in Prince George’s County, in 2015 they still made up a quarter of all offers, give or take, in Prince George’s, Montgomery County, and DC.

To minimize the advantages of an all-cash offer relative to what we’d be able to offer, my wife and I got preapproved for a loan with a community bank. Preapproval reduced the risk that our financing would fall through. We chose a community bank (instead of a credit union or a larger bank, like Wells Fargo) because it did its underwriting in-house. With fewer players involved, we would be able to close in far less time than would take other financed buyers.

Having gotten pre-approval, we found a real estate agent and began touring houses. After seeing ten houses or so, found one we were ready to make an offer on.

Escalation clauses advantage buyers who have more money for a down payment or who have been preapproved for a higher mortgage

An escalation clause is a section you can add to your offer that says your bid will automatically go up (to an amount you decide, of course) if someone else bids more. These can seem helpful for first time home buyers, as they allow you to make your offer competitive while ensuring that you bid the least amount possible to win.

In our first offer, we set an escalation amount—$1,000 over the next highest offer—and a ceiling price. Our ceiling was limited by our preapproval and how much money we had on hand to cover the larger down payment.

Ultimately, we lost to a more attractive bid. We felt like we had done everything we could, but that somehow, the next offer we wrote would have to be even more competitive.

Photo by Vicki on Flickr.

Removing the inspection contingency is a risky strategy for a buyer who can’t afford unexpected repairs after closing

Typically, offers include an inspection contingency to make sure that the house is sound and that big ticket items, like the roof, don’t have to be replaced immediately. After a home inspector writes her report and before closing, the buyer and seller can negotiate the cost and responsibility for repairing any issues.

The inspection contingency protects the buyer and allows her to walk away if the seller won’t address critical fixes. Like the mortgage contingency, some people waive the home inspection to make their bids more competitive.

Neither my wife nor I wanted to forgo an inspection because we knew it would take time to rebuild our savings after closing and we wouldn’t be able to afford a large repair right away. With our budget, we were looking at older houses that would likely need something fixed. Someone planning to flip a house wouldn’t have these concerns.

We ended up waiving the inspection contingency after all, but only because the sellers let us inspect the house before we put in an offer. If it had revealed major issues, we wouldn’t even have written one, instead eating the cost of the inspection. Luckily for us, the house didn’t need any major repairs, and we were able to write a winning offer.

Even if different mortgage options make it easier to save for a down payment, the risks others are willing to write into their offers makes it hard for first-time buyers to be competitive.

In some cases, competing homebuyers may be more able to waive the mortgage contingency or the inspection contingency and shoulder the risk of coming up with the full cost of the house or major repairs. In a bidding war, people with more money up front may be able to escalate their bid to a higher price. Each of these may be more appealing to a seller than a traditional offer that is dependent on a mortgage or a home inspection.

I looked for data on how often homebuyers use escalation clauses and waive inspection contingencies, but couldn’t find any. Have you used them, or lost out to to them? Share in the comments below.

Scott Baumgartner is a researcher who studies income support and workforce programs for low-income families and children. He and his wife live in East Silver Spring with their two dogs, and they have lived in the DC area since 2008.  He works for Mathematica Policy Research, but any views expressed here are his own.