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In housing markets teeming with buyer demand, it’s not uncommon to put an offer on a home only to be outdone by a competing offer. If two or more potential buyers want a property badly enough, they may find themselves locked in a bidding war.

Some market watchers think that pent-up demand from homebuyers and increasing seller activity will make for a busy homebuying market in 2025. And let’s face it: Some markets are always competitive, and new “hot” markets are born regularly.

Here’s how to increase your chances of winning a bidding war so you don’t have to bid adieu to a home you really want.

1. Know How a Bidding War Works

Bidding wars usually take place in a seller’s market, when demand outpaces housing inventory. They also typically occur when there are multiple interested parties and when there is some sort of constraint, like timing.

When a seller’s agent receives offers for a property that has attracted a lot of buzz, the agent may set a date by which would-be buyers should make their “highest and best” offer. Sellers can accept the best offer, counter one offer while putting the others to the side while awaiting a decision, or counter one offer and reject the others.

This brings up a salient point: It’s true that you can buy a house without a Realtor® or real estate agent, but an experienced agent can guide you through offers and counteroffers, contingency snags, and more.

2. Line Up Your Financing

One of the best things you can do to be prepared for a potential bidding war — or really any time — is to get your finances, and financing, in order.

Be sure to know how much house you can afford, including a down payment and monthly payments.

Determine if you qualify for a mortgage by going through the prequalification with several lenders. Familiarize yourself with the types of mortgage loans that are available: government-backed loan or conventional loan, fixed rate or adjustable rate.

Taking the next step beyond prequalification and go through the mortgage preapproval process. Getting preapproved for a mortgage will give you a specific amount that a lender is tentatively willing to let you borrow. A preapproval letter shows sellers that you are a serious candidate to buy a home. Many experts recommend getting at least three preapproval letters from three lenders.

And a preapproval letter shows sellers that you are a serious candidate to buy a home. Many experts recommend getting at least three preapproval letters from three lenders.

3. Lessen or Drop Contingencies

Contingencies are certain conditions that must be met before a real estate deal becomes binding. Potential buyers can back out of a deal without penalty if the contingencies aren’t met.

A clean offer, one with as few contingencies as possible, is attractive to sellers in a competitive market.

In a typical real estate market, a common contingency is the mortgage contingency, or financing contingency, which allows homebuyers to exit the deal and have their earnest money returned if they cannot secure financing by the agreed-upon deadline.

Another is the inspection contingency. Based on the findings of a professional inspection, the buyer may be able to negotiate repairs or the price, which are known as seller concessions if the sellers are agreeable, or cancel the contract.

Waiving contingencies shows your eagerness to triumph, but it comes with risk. The biggest is losing your earnest money deposit if you hit a snag.

4. Be Quick About Any Remaining Contingencies

Sellers want to avoid spending a lot of time with a potential buyer only to have the deal fall through. If you’re including appraisal and inspection contingencies, do what you can to expedite them.

The real estate purchase contract includes any contingencies, the sales price, the closing date, and the date of the title transfer and possession. The contract is considered a working document until both parties agree on the terms.

5. Use an Escalation Clause

Unsurprisingly, one of the best ways to win a bidding war is by offering more money.

You may want to include an escalation clause in the contract if you assume there will be multiple offers. The clause asserts that if another buyer makes a competing offer, your bid will automatically increase by a certain amount, up to a limit, to exceed the offer.

Say you put a $400,000 offer on a home, with an escalation amount of $10,000 and a ceiling of $430,000. If someone else bids $410,000, you will automatically bid $420,000, up to your ceiling.

6. Stay Flexible

A willingness to be flexible can give you a leg up in the eyes of a seller.

For example, a seller might be moving across the country for work and need to close by a specific date. So if you can get the appraisal and inspection done swiftly, that could be a huge plus.

Alternatively, sellers may need to stay in the house for a while. Working with them on their specific needs could give you an edge.

7. Pay With Cash

If you are able to do it, buying a house with cash can be very attractive to sellers. The process is typically much faster than going through a lender, and sellers don’t want to worry about financing issues that might hold up the deal or cause it to fall through.

It’s even possible that a seller would choose a cash offer over a slightly higher offer backed by a mortgage.

8. Increase Your Deposit

There are timeless standards for how to make an offer on a house. One is determining the size of your earnest money deposit.

The deposit, held in escrow by the title company, secures the real estate contract. It tells the seller that you are serious about buying the house.

Earnest money is typically 1% to 3% of the purchase price but can be more in a competitive market. If you close on the home, the deposit will be applied to your closing costs.

9. Write a Personal Letter

When sellers are choosing a buyer during a bidding war, they’re often just looking at numbers on a page. Consider writing a offer letter, aka a love letter, to humanize the transaction.

You might want to make a case for why you’re the ideal candidate to buy the home, and note commonalities: You’re a ceramicist and noticed an artist’s studio in the backyard. You have dogs; they have a dog. That big elm reminds you of the one at your childhood home.

Be complimentary about the things you like about the house and how it has been maintained. And be concise.

The Takeaway

Whether you’re buying in a time of burgeoning bidding wars or not, it’s good to know how they work. The tactics help homebuyers understand the lay of the real estate land — contingencies, earnest money, escalation clauses, love letters — and use them to best effect.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Can a homeowner refuse to sell a house to a particular buyer?

Yes, a seller can refuse to sell a home to a buyer without penalty as long as there is no purchase agreement in place, and as long as the refusal is not a violation of the Fair Housing Act. The act prohibits housing discrimination based on sex, race, color, familial status, or national origin.

When should you walk away from a bidding war?

You’ll know you should walk away from a bidding war when you run the numbers on a home mortgage calculator and determine that the monthly payments just aren’t feasible (or are doable but will keep you awake nights). Other reasons to walk away include: The home was pricey for the market or a stretch for your budget at its initial asking price; there are multiple bidders; or the house wasn’t your dream home to begin with.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SOHL-Q424-139

When you’re ready to buy a house and need a home loan, a mortgage broker can help you shop for a mortgage, or you can go straight to a direct lender such as a bank or credit union and get the mortgage on your own.

Which way of shopping for a mortgage is better? If you have credit issues or other needs, using a broker to see an array of options might make sense. But if your financial health is solid and you want to save time and money, applying with a direct lender could be a good course of action.

In any case, it’s smart to get a few quotes and compare offers for the same type of loan and term.

What Is a Mortgage Broker?

A mortgage broker is like a personal shopper for home loans and serves as an intermediary between the mortgage seeker and lenders, including banks, credit unions, and private mortgage companies.

With a single application, a broker will provide you with access to different types of mortgage loans and, if you choose one, will walk you through underwriting.

Mortgage brokers are licensed and regulated. You’ll want to ensure that any broker you’re interested in working with is credentialed by checking the Nationwide Multistate Licensing System & Registry consumer access site. You can also check platforms like the Better Business Bureau and Yelp to see what past clients say.

Brokers are compensated by the borrower or lender. Borrower fees typically range from 1% to 2% of the total loan amount. Lender commissions may range from 0.50% to 2.75% of the total loan amount, but lenders usually pass the costs on to borrowers by building them into the loan.

How to Find a Mortgage Broker

You could ask your current lending institution, friends, family members, or real estate agent for a referral to a mortgage broker. After checking licensing, you may interview more than one broker before deciding on one. You might want to ask about their fees, lenders they work with, and experience.

What Is a Direct Lender?

In the mortgage broker vs. lender dichotomy, a direct lender is the bank, credit union, or mortgage company that originates, processes, and funds mortgages.

Mortgage loan officers, processors, and underwriters work for the company. Loan originators usually work on commission.

A loan officer may offer a mortgage at various price points, from a loan with discount points for a lower rate to a no-closing-cost loan, which is when the lender agrees to pay the closing costs in exchange for a higher interest rate.

Recommended: First-Time Homebuyer Guide

How to Find a Direct Lender

Most people have a relationship with a bank or credit union, so you can always start by getting a quote there. But there are myriad online mortgage lenders and it’s worth considering these options. Pulling up the day’s mortgage rates online will conjure a list of direct lenders advertising their rates.

What Are the Pros of Working With a Mortgage Broker?

Because they are able to offer a variety of quotes from different sources, brokers can be useful if you’re looking to easily compare mortgage options.

They may offer specialized loans, and because loan brokers set their own profit margins, negotiating could be easier.

A broker could be useful if you have concerns like a fair or bad credit score or student loan debt.

What Are the Cons of Working With a Mortgage Broker?

Brokers may have preferred lenders that don’t necessarily offer the best interest rate. If paid by lender commission, a broker could be tempted to steer a borrower to a more expensive loan.

If paid by lender commission, a broker could be tempted to steer a borrower to a more expensive loan.

Brokers’ loans may take longer to close.

Broker fees tend to be higher, but that could be because the mortgages offered are sometimes more complex. And mortgage brokers may charge borrowers directly (the fee of 1% to 2% of the total loan amount).

What Are the Pros of Working With a Direct Lender?

By working with a direct lender, you’ll skip the broker fees, and you may get a better rate with lower closing costs (although both lenders and brokers can offer “rebate pricing” — a higher interest rate in exchange for lower up-front costs).

A direct lender typically does all the loan processing, underwriting, and closing in-house.

You may be able to negotiate underwriting or origination fees.

What Are the Cons of Working With a Direct Lender?

Comparing rates and terms on your own from a sample of lenders takes time.

You’re limited to the loan programs of the institutions where you decide to shop.

What Works for My Situation?

You’ve probably toyed with at least one home affordability calculator and gotten preapproved for a loan.

Once you’ve found a home and your offer has been accepted, it’s decision time on a lender. You are not required to stay with the lender you used for pre-approval.

If you have a sparse credit history, subpar credit, or other challenges, a mortgage broker might be able to find a loan program that’s a good fit.

But if you have solid credit, a strong income, and assets, you may be able to save time and money by working with a direct lender.

What about rates? In weighing mortgage broker vs. bank, there might be no difference to speak of. The rate you’re offered depends more on your qualifications than on the lender.

The mortgage loan process can seem mysterious, and a broker or a loan officer at a direct lender can act as a loan seeker’s guide.

That guide should be willing to answer all of your mortgage questions, including those about points, fees, mortgage insurance, and the closing timetable.

You’ll receive loan estimates after applying. When comparing mortgage offers, it’s important to look at more than the interest rate. Be sure to compare annual percentage rates, or APRs, as well.

Look at the fees in the “loan costs” section, and compare closing costs.

The Takeaway

If you’re in the market for a mortgage, you might think the choice comes down to mortgage broker vs. direct lender. But you may get loan quotes from both and compare them. It’s called shopping, and a home is a rather important purchase. And as with any form of shopping these days, it’s easily done with a phone or computer, from the comfort of your couch.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Is it better to use a broker or a direct lender?

If you have a challenging credit score, or limited credit history, or other financial complexities, a broker might be the way to go. But if your finances are solid you may find going the direct lender to be the most cost-effective way to obtain a home loan.

Why use a mortgage broker instead of just going to a bank?

A mortgage broker can research possible rates from a wide range of lenders, which could save you time. And if you have a challenging financial situation or credit history, a broker might be able to steer you to a lender who will work with your profile.

Does a mortgage broker charge a fee?

Yes. A borrower may have to pay a mortgage broker’s fee of 1% to 2% of the loan amount. When the lender pays a broker a commission, it may range from 0.50% to 2.75% of the total loan amount and these costs are passed on to the borrower by being built into the loan.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOHL-Q324-031

A 401(k) plan is a retirement savings plan in which employees contribute to a tax-deferred account via paycheck deductions (and often with an employer match). A pension plan is a different kind of retirement savings plan in which a company sets money aside to give to future retirees.

Over the past few decades, defined-contribution plans like the 401(k) have steadily replaced pension plans as the private-sector, employer-sponsored retirement plan of choice. While both a 401(k) plan and a pension plan are employer-sponsored retirement plans, there are some significant differences between the two.

Here’s what you need to know about a 401(k) vs. pension.

What Is the Difference Between a Pension and a 401(k)?

The main distinction between a 401(k) vs. a pension plan is that pension plans are largely employer driven, while 401(k)s are employee driven.

These are some of the key differences between the two plans.

Funding

Employees typically fund 401(k) plans through regular contributions from their paychecks to help save for retirement, while employers typically fund pension plans.

Investments

Employees can choose investments (from several options) in their 401(k). Employers choose the investments that fund a pension plan.

Value

The value of a 401(k) plan at retirement depends on how much the employee has saved, in addition to the performance of the investments over time. Pensions, on the other hand, are designed to guarantee an employee a set amount of income for life.


💡 Quick Tip: The advantage of opening an IRA and a tax-deferred account like a 401(k) or traditional IRA is that by the time you retire, you’ll have tax-free income from your Roth, and taxable income from the tax-deferred account. This can help with tax planning.

Pension Plan Overview

A pension plan is a type of retirement savings plan where an employer contributes funds to an investment account on behalf of their employees. The earnings are paid out to the employees once they retire.

Types of Pension Plans

There are two common types of pension plans:

•   Defined-benefit pension plans, also known as traditional pension plans, are the most common type of pension plans. These employer-sponsored retirement investment plans are designed to guarantee the employee will receive a set benefit amount upon retirement (usually calculated with set parameters, i.e. employee earnings and years of service). Regardless of how the investment pool performs, the employer guarantees pension payments to the retired employee. If the plan assets aren’t enough to pay out to the employee, the employer is typically on the hook for the rest of the money.

According to the IRS, annual contributions to a defined-benefit pension plan cannot exceed 100% of the employee’s average compensation for the highest three consecutive calendar years of their employment or $275,000 for 2024, $280,000 for 2025.

•   Defined-contribution pension plans are employer-sponsored retirement plans to which employers make plan contributions on their employee’s behalf and the benefit the employee receives is based solely on the performance of the investment pool. Meaning: There is no guarantee of a set monthly payout.

Like 401(k) plans, employees can contribute to these plans, and in some cases, employers match the contribution made by the employee. Unlike defined-benefit pension plans, however, the employee is not guaranteed a certain amount of money upon retirement. Instead, the employee receives a payout based on the performance of the investments in the fund.

Recommended: What Is a Money Purchase Pension Plan (MPPP)?

When it comes to pension plan withdrawals, employees who take out funds before the age of 59 ½ must pay a 10% early withdrawal penalty as well as standard income taxes. This is similar to the penalties and taxes associated with early withdrawal from a traditional 401(k) plan.

Pros and Cons

There are benefits to and drawbacks of pension plans. It’s important to understand both in order to maximize your participation in the plan.

Advantages of a pension plan include:

Funded by employers

For employees, a pension plan is retirement income from your employer. In most cases, an employee does not need to contribute to a defined-benefit pension plan in order to get consistent payouts upon retirement.

Higher contribution limits

When compared to 401(k)s, defined-contribution pension plans have significantly higher contribution limits and, as such, present an opportunity to set aside more money for retirement.

A set amount in retirement

A pension plan typically provides employees with regular fixed payments in retirement,usually for life.

Disadvantages of a pension plan include:

Lack of control

Employees can’t choose how the money in a pension plan is invested. If the investments don’t pan out, the plan could struggle to pay out the funds.

Vesting

Employees may need to work for the employer for a set number of years to become fully vested in the plan. If you leave the company before then, you might end up forfeiting the pension funds. Find out what the vesting schedule is for your pension plan.

Earnings and years employed

How much an employee gets in retirement with a pension plan generally depends on their salary and how long they work for the employer.

401(k) Overview

A traditional 401(k) plan is a tax-advantaged defined-contribution plan where workers contribute pre-tax dollars to the investment account via automatic payroll deductions. These contributions are sometimes fully or partially matched by their employers, and withdrawals are taxed at the participant’s marginal tax rate.

With a 401(k), employees and employers may both make contributions to the account (up to a certain IRS-established limit), but employees are responsible for selecting the specific investments. They can typically choose from offerings from the employer, which may include a mixture of stocks and bonds that vary in levels of risk depending on when they plan to retire.

Recommended: 401(a) vs 401(k): What’s the Difference?

Contribution Limits and Withdrawals

To account for inflation, the IRS periodically adjusts the maximum amount an employer or employee can contribute to a 401(k) plan.

•  For 2024, annual employee contributions can’t exceed $23,000 for workers under 50, and $30,500 for workers 50 and older (this includes a $7,500 catch-up contribution). The total annual contribution by employer and employee in 2024 is capped at $69,000 for workers under 50, and $76,500 for workers 50 and over.

•   For 2025 the total employer + employee limit is $70,000, $77,500 with standard catch-up, or $81,250 with the SECURE 2.0 catch-up for those ages 60 to 63 only.

Some plans allow employees to make additional after-tax contributions to their 401(k) plan, within the contribution limits outlined above.

•   Money can be withdrawn from a 401(k) in retirement without penalties. But taxes will be owed on the funds withdrawn. The IRS considers the removal of 401(k) funds before the age of 59 ½ an “early withdrawal.” The penalty for removing funds before that time is an additional tax of 10% of the withdrawal amount (there are exceptions, notably a hardship distribution, where plan participants can withdraw funds early to cover “immediate and heavy financial need”).

Pros and Cons

While a 401(k) plan might not offer as clearly-defined a retirement savings picture as a pension plan, it still comes with a number of upsides for participants who want a more active role in their retirement investments.

Advantages of a 401(k) include:

Self-directed investment opportunities

Unlike employer-directed pension plans, in which the employee has no say in the investment strategy, 401(k) plans offer participants more control over how much they invest and where the money goes (within parameters set by their employer). Plans typically offer a selection of investment options, including mutual funds, individual stocks and bonds, exchange traded funds (ETFs).

Tax advantages

Contributions to a 401(k) come from pre-tax dollars through payroll deductions, reducing the gross income of the participant, which may allow them to pay less in income taxes. Also, 401(k) contributions and earnings in the plan may grow tax-deferred.

Employer matching

Many 401(k) plan participants are eligible for an employer match up to a certain amount, which essentially means free money.

Disadvantages of a 401(k) include:

No guaranteed amount in retirement

How much you have in your 401(k) by retirement depends on how much you contributed to the plan, whether your employer offered matching funds, and how the investments you chose fared.

Contributions are capped

The amount you can contribute to a 401(k) annually is capped by the IRS, as described above.

Less stability

How the market performs generally affects the performance of 401(k) investments. That could make it difficult to know how much money you’ll have for retirement, which could complicate retirement planning.


💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Which Is Better, a 401(k) or a Pension Plan?

When considering a 401(k) vs. pension, most people prefer the certainty that comes with a pension plan.

But for those who seek more control over their retirement savings and more investment vehicles to choose from, a 401(k) plan could be the more advantageous option.

In the case of the 401(k), it really depends on how well the investments perform over time. Without the safety net of guaranteed income that comes with a pension plan, a poorly performing 401(k) plan has a direct effect on a retiree’s nest egg.

Did 401(k)s Replace Pension Plans?

The percentage of private sector employees whose only retirement account is a defined benefit pension plan is just 4% today, versus 60% in the early 1980s. The majority of private sector companies stopped funding traditional pension plans in the last few decades, freezing the plans and shifting to defined-contribution plans like 401(k)s.

When a pension fund isn’t full enough to distribute promised payouts, the company still needs to distribute that money to plan participants. In several instances in recent decades, pension fund deficits for large enterprises like airlines and steel makers were so enormous they required government bailouts.

To avoid situations like this, many of today’s employers have shifted the burden of retirement funding to their workers.

What Happens to a 401(k) or Pension Plan If You Leave Your Job?

With a 401(k), if you leave your job, you can take your 401(k) with you by rolling it over to your new employer’s 401(k) plan or into an IRA. The process is fairly easy to do.

If you leave your job and you have a pension plan, however, the plan generally stays with your employer. You’ll need to keep track of it through the years and then apply in retirement to begin receiving your money.

The Takeaway

Pension plans are employer-sponsored, employer-funded retirement plans that are designed to guarantee a set income to participants for life. On the other hand, 401(k) accounts are employer-sponsored retirement plans through which employees make their own investment decisions and, in some cases, receive an employer match in funds. The post-retirement payout varies depending on market fluctuations.

While pension plans are far more rare today than they were in the past, if you have worked at a company that offers one, that money will still come to you after retirement even if you change jobs, as long as you stayed with the company long enough for your benefits to vest.

Some people have both pensions and 401(k) plans, but there are also other ways to take an active role in saving for retirement. An IRA is an alternative to 401(k) and pension plans that allows anyone to open a retirement savings account. IRAs have lower contribution limits but a larger selection of investments to choose from. And it’s possible to have an IRA in addition to a 401(k) or pension plan.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQ

Can you have both a 401(k) and a pension plan?

Yes. An individual can have both a pension plan and a 401(k) plan, though the two plans may not be from the same employer. If an employee leaves a company after becoming eligible for a pension and opens a 401(k) with a new employer, their previous employer will still typically maintain their pension. An employee can access the pension funds by applying for them in retirement.

How much should I put in my 401k if I have a pension?

If you have both a pension and a 401(k), it’s wise to contribute as much as you can to your 401(k) up to the annual contribution limit. While a pension can help supplement your retirement income, it may not be enough to cover all your retirement expenses, so contributing to your 401(k) can help fill the gap. One rule of thumb says to contribute at least 10% of your salary to a 401(k) if possible to help ensure that you’ll have enough savings for retirement.

Photo credit: iStock/Sam Edwards

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.