Buying A House With Cash: A Guide
Carey Chesney5-Minute Read
March 09, 2022
If your piggy bank is full and it’s time for a move, you could have an opportunity to buy a house with cash.
There are several advantages to buying a house with cash including winning bidding wars and closing quickly on your dream home. However, there are drawbacks as well. Knowing the pros and cons of a cash purchase is an essential part of making the right move.
Buying with cash is common among investors, downsizing boomers and – increasingly – first time home buyers. Even if you don't fall into any of these groups, buying a house with cash is something any prospective home buyer should consider.
Can You Buy A House With Cash?
Absolutely! Not only can you buy a house with cash, In today’s overheated housing market, buying with cash offers important competitive advantages. Taking out a mortgage is, of course, an option as well. But for people that can afford it, buying a house with cash has some real, tangible benefits.
Why Should I Make A Cash Offer On A House?
The pandemic housing market is a prolonged seller’s market, which means that there is a high demand for an extremely limited pool of homes. In several local markets, buyers compete in bidding wars for houses they haven’t even seen in person!
How do you win a bidding war? Well, price is the first factor, of course. The more you offer, the more likely you are to get the home. However, when multiple offers have a similar sales price, other factors come into play. Sellers look at a number of different variables between offers from inspection timelines, to appraisal guarantees, to financing terms. When it comes to these last two factors, cash is king (more on this later).
Buying a house with cash has other benefits as well. You won’t have a monthly mortgage payment and won’t pay any interest on the home purchase. In addition, you’ll find the process of buying a home much smoother (and faster) than purchasing with a mortgage.
How Does Buying A House With Cash Work?
Buying a house with cash is fundamentally different from buying a house with a mortgage. For starters, cash buyers can skip the preapproval process. This can be a time consuming and financially invasive process for buyers, so bypassing it completely is appealing.
With an offer contingent on getting mortgage approval, buyers need to submit a preapproval letter from their lender. If you are paying with cash, you need a proof of funds letter to attach to offers in lieu of a preapproval letter.
Getting to the closing table means simply completing the inspection process and making sure all the title work is in order. Once the deal is ready to be finalized, you will need to bring a certified check or cashier’s check to closing.
Why Do Sellers Prefer Cash Offers For Their Homes?
When you research how to make an offer on a house, it’s important to know the difference between a cash offer and an offer contingent on a loan. It’s also important to know how getting an offer accepted in a seller’s market is different between the two.
To put it succinctly, sellers love cash offers. Here are a few of the main reasons why.
Removes Uncertainty From The Transaction
Cash removes lenders – and the mortgage approval process – from the sales transaction. This means when a seller receives a cash offer (with proof of funds) they can be almost 100% confident the deal will make it to the closing table.
When offers contingent on a loan are submitted, sellers need to research the lender, the loan terms, and a variety of other factors to decide if they are confident the loan will get approved. This uncertainty can be discomforting for sellers, and it is wiped away when buyers pay with cash.
Avoids Problems Caused By Lender Requirements
Even if buyers make offers without contingencies – lenders will still require a home appraisal, and may, in some cases, request a home inspection. There are a variety of problems that might be created by these processes.
When home inspections are required by lenders, issues with the home can squash the deal. For example, VA loans often require a pest inspection that must be paid for by the seller. In addition to the cost of the inspection, the seller might also be on the hook for any necessary repairs.
The home appraisal process is another hurdle that can bust up a home sale transaction. If the home doesn't appraise for the offer amount, the lender won't approve the loan unless the buyer brings cash to closing to cover the difference between the sale price and the appraisal amount.
Allows Sale To Proceed Quickly
If you are wondering how long it takes to close on a house, it has a lot to do with the financing. With a mortgage, the approval process can take anywhere from 30 to 45 days, sometimes even longer. This is because the buyer must be preapproved to make an offer, the house needs to be appraised, and the loan needs to be sent to underwriting for final approval.
With a cash sale, all of these steps go away. That means cash sales close in a matter of weeks or days, instead of months. This is appealing to sellers who are looking to get their home sold quickly, which is most often the case.
What Do Buyers Need To Think About Before Buying A Home With Cash?
Buying a house with cash may sound easy, but there are some things to consider before writing that check and moving into your new home.
Should I Keep My Money In The House?
The answer depends on your unique situation. Buying a house with cash can make a lot of sense for some buyers. It can also make no sense at all for others. Let’s take a look at a few types of buyers and why buying a house with cash may or may not be a good idea.
For many people – particularly empty nesters who are downsizing – there may be no pressing financial reason to get a mortgage, and they may enjoy the peace of mind that comes with owning a home outright. After a lifetime of mortgage payments, the idea of owning your home “free and clear” can be very appealing.
First Time Home Buyers
Many first-time home buyers are being forced to convert all their assets to cash to make a competitive offer and are enduring great economic stress as a result. In this case, you may want to consider refinancing once you own the home to return cash to your 401(k)s, investments and emergency savings.
Investors need cash on hand to take advantage of the next investment opportunity. Using a loan or refinancing a property after they pay cash is a good way to keep investment capital at the ready.
How Quickly Can I Take My Cash Back Out and How Much Can I Get?
Real estate is considered an illiquid investment. “Liquidity” refers to the ability to get your hands on your money quickly should you need to. For example, if you have your money in a stock account that you need to tap for medical bills or college expenses, it is a relatively easy process.
However, if your money is all tied up in a house, you can’t access it without selling the property, which can sometimes be a lengthy process.
The amount of money you can get back out depends largely on appreciation. If you aren’t in the home long enough for the value to increase significantly, you may take a loss after factoring in the cost of selling.
Are There Benefits To Leaving Cash In The Home?
Delayed Financing: An Alternative To Leaving Cash In Your Home
After a home purchase is complete, owners who paid in cash can apply for delayed financing. Delayed financing allows you to purchase a home with an upfront cash payment. Within 6 months of your closing date, you can then begin the process of a cash-out refinance, which allows you to take out a mortgage for the property and have your cash investment returned to you without associated fees of a routine cash-out refinance. Many lenders, including Rocket Mortgage®, offer delayed financing.
A Word Of Warning: Get A Home Inspection
With bidding wars being the norm, many buyers are going to great lengths to secure their next home. This includes waiving the home inspection contingency and moving along toward finalizing the sale. Don’t do it. A home inspection before closing is essential to make sure you know what you're getting yourself into.
Even if you waive the inspection contingency, you should still do a home inspection. You can still walk away from the purchase if the repairs needed are more extensive – and expensive – than you are ready for, but you might lose your earnest money.
The Bottom Line: Understand The Risks Before Making A Cash Offer
There are both risks and rewards to making a cash offer when buying a home. Weigh the pros and cons before making the best decision for your unique situation. Ready to make a move? Learn more about housing trends where you live or want to live.
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