What to Expect When Buying a House with Cash
If you’ve put aside a large sum of money, you can bypass the mortgage process and pay for your new home with cash. But how?
Some home buyers don’t have to take out a mortgage on a home because they have enough cash. Perhaps they’ve earned the money, won the lottery, or received a generous inheritance and are wondering whether they should use the funds to purchase a house with cash or get a traditional mortgage.
On one hand, getting a mortgage will keep a substantial amount of money available for a remodel of the new property, travel, or other investments. On the other hand, paying for a house in full could provide enormous relief by eliminating long-term debt.
Should you pay cash for a home or obtain a mortgage in this situation? We’ll explore the advantages and disadvantages of buying a house with cash.
Can you buy a house with cash?
Buying a house with cash may seem far-fetched nowadays, but it still occurs relatively frequently. As a matter of fact, about one-fifth of buyers pay for their homes with cash. One of the most significant sources of cash home buyers are companies that invest in real estate. Many of these companies, such as house flippers or iBuyers, buy houses for cash, fix them up, and resell them. But these aren’t the only groups who want to buy homes for cash.
Many homeowners purchase a home with cash using investment accounts that have accrued substantial gains over the years. Others may sell their current home and use the money to buy a new home or condo. Some may find more unique ways to save for a cash purchase on a home.
After gathering the funds needed to purchase a home and finding a property, they need their bank to provide proof of their ability to buy with cash. They can expect to close on the transaction within about two weeks. That’s substantially less time-consuming than getting a mortgage, which generally takes 30 to 45 days (or even longer if there is a short sale).
Once the cash buyer closes on the home, they own it free and clear. However, the homeowner will still have to pay additional expenses, like homeowners insurance, homeowners association fees, and property taxes.
While buying a house with cash may not be as complicated as a traditional mortgage, the process isn’t exactly easy. It is just a different option for purchasing a home with its unique set of pros and cons.
Buying a house with cash has its benefits.
A solid cash offer can win a bidding war in a competitive market. With several offers on the table, a homeowner could become overwhelmed. Therefore, someone arriving to save the day with a cash offer may be able to stand out from other buyers and get the home they want more easily.
Buying a house with cash isn’t just an excellent strategy when competing against many other buyers—it has other benefits, too. The most obvious is the peace of mind that comes with knowing lenders and foreclosure can’t take their home away over missed payments. Without the looming debt of a long-term mortgage, cash house buyers can use their monthly income in other ways, including investing, vacationing, and more. Below are all of the advantages to purchasing a house with cash.
Home sellers are partial to cash home buyers.
Cash is king, and this statement is especially true in the home buying process. Both home buyers and real estate agents like to deal with cash buyers because there are fewer reasons for these deals to fall through at the last moment. Cash buyers can also make the process much faster for homeowners who are eager to move. Considering the perks, it makes sense that home buyers often prefer an all-cash purchase.
There aren’t any mortgage payments.
A worthwhile benefit of paying for a house with cash is not making monthly mortgage payments. This not only equates to more available money each month but also over the long term. Instead of paying interest on a mortgage over the next 15 to 30 years, homeowners can park the interest somewhere else, like an investment account.
Foreclosure is never a worry.
When purchasing a house with cash, it belongs to the homeowner instead of the mortgage institution. Therefore, they never have to dread going into foreclosure or having their home taken away for nonpayment.
Closing is usually faster.
Another great thing about buying a house with cash is that buyers have more control over the transaction. Instead of being at the mercy of mortgage companies who may delay and even deny applications, a house can be closed more quickly, typically within two weeks or less. They might also avoid additional closing costs associated with a mortgage.
It’s an easier buying process for some.
International buyers, expats returning to the United States, and those with minimal credit history may have issues trying to obtain a mortgage. Cash eliminates the need for lenders to search credit histories and allows those without a strong credit history to purchase with fewer hassles.
A house that’s in disrepair or over-improved is easier to buy with cash.
In some cases, lenders won’t provide a mortgage on certain properties. For instance, a seller may have trouble finding buyers for a home that is dilapidated. Trouble securing loans doesn’t only apply to homes in disrepair, either. An overly ornate house that costs significantly more than comparables in the local area may not get a lender’s approval, no matter how stunning it is. Cash buyers usually aren’t at the mercy of a lender. So, they can purchase a house with cash in an as-is condition.
There are drawbacks to paying cash for a house.
Just because cash can put a home buyer in a commanding position doesn’t mean this option is always the best one in the long run. Yes, a cash purchase may be more appealing in a competitive market, and yes, a homeowner won’t have to deal with long-term debt. However, cash deals can be problematic.
One thing obtaining a mortgage does is provide the cash buyer with leverage since they won’t have to sink all their money into their home purchase. Cash buyers don’t have as much leverage with their purchases: once they purchase their house, they own it. However, if the homeowner sinks all of their money into a single asset, they will have to sell the house to get money from it. And if the homeowner has to sell their place in a recession, they may not get the money they paid up-front for the house.
Another disadvantage of a cash purchase is that the buyer may not inspect the property as thoroughly a lender would. When a lender invests in a property, they perform extensive checks to ensure that it’s free of problems that could compromise the investment.
When a cash buyer makes an eager purchase, they may not do a rigorous search on the property’s title or get an appraisal. This may not only cause them to overpay for the property, but they could also inherit concerns overlooked in the buying process, such as expensive home improvement issues, liens, or even property line disputes. These are all potential disadvantages of purchasing a home with cash.
Less cash is available for emergencies.
Unfortunately, homeowners can tie up all their money by purchasing a home with cash. Even if the house needs expensive repairs or unexpected medical bills arise, the buyer may not have the available funds to afford either.
Zero liquidity is available from the property.
Unless a homeowner has other financial resources besides the money they sink into the home purchase, buying a house with cash limits their cash on hand. To achieve liquidity, the homeowner will have to sell the house or take out a mortgage on the home.
Mortgage tax deductions can’t be taken.
When mortgaging a home, the government provides a tax incentive for homeowners to help them lower the amount of taxes they owe. Unfortunately, cash house buyers can’t take advantage of this tax incentive.
Hidden issues previously preventing the sale of a property may be inherited.
Cash home buyers can bypass many obstacles, but they run the risk of inheriting any problems associated with their new property. This includes structural issues usually caught by home inspections, as well as less visible issues, like the outcome of a pending lawsuit on the property. These surprises may complicate selling the house in the future.
Tips on How to Buy a House With Cash
Even when the advantages of buying a home with cash outweigh the risks, cash buyers should still exercise due diligence when making their purchase.
When buying a home with cash, it may be tempting to hurry up and get the process over with, but this could lead to problems later. Instead, a cash buyer is better off using the same amount of discretion that a mortgage lender uses in the approval process to avoid losing money in a bad deal.
A cash home buyer can purchase a home without a real estate agent. However, it is a good idea to utilize their expertise throughout the process. It is also a good idea to secure a real estate attorney well-versed in contracts to help during the process, especially as it relates to the transfer of the title.
The initial part of the cash buying process is straightforward. A cash buyer acquires the cash, obtains proof of funds (POF) from the bank, and starts looking for a home. After a homeowner decides on a home, the purchasing process can get as complicated as a mortgage purchase. Therefore, it is ideal for a cash buyer to tread this part of the process carefully. They should consider having an inspection, getting a proper appraisal, getting title research done, putting aside earnest money in the form of a cashier’s check, and securing a homeowners insurance policy.
Once the transaction takes place, the cash buyer owns the home and inherits any problems. Therefore, it’s a good idea to approach the purchasing process as meticulously as a lender would.
Can you buy a house with cash? Yes, you can. However, the best option between purchasing a house with cash or a mortgage depends on the buyer and their financial situation. Since both options have significant pros and cons, it’s a good idea to seek the assistance of tax professionals and financial advisors who will assess how each option could affect your long-term financial goals.
If you want to proceed with a cash purchase, it’s also a good idea to include other professionals in the process, such as attorneys and real estate agents. This can prevent you from falling victim to fraud or oversight.