Everything To Know About Buying A House With Cash

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! You can buy a house with cash. Oftentimes, it’s more appealing to the seller because it promises a faster and simpler closing. Buyers can benefit from the leg up in a competitive housing market, avoid mortgage fees and interest rates and save money in the long run. 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.

Reasons To Make A Cash Offer On A House

Buying a house with cash is more common in a seller’s market, which means that there is a high demand for an extremely limited pool of homes. By offering all cash, buyers can stand out in a competitive market. In a multiple-offer situation, 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.

Here are more details on common reasons a buyer makes a cash offer:

• Better chance of competing against other buyers: Getting an offer accepted in a seller’s market isn’t easy, especially when there are bidding wars. Cash offers often outcompete buyers with higher financed offers. When you buy a home with cash, you remove uncertainty from the transaction and remove problems caused by lender requirements. This means when a seller receives a cash offer (with proof of funds) they can be almost 100% confident the deal will quickly make it to the closing table.
• Avoid paying interest: By paying all cash and not taking out a mortgage, you can avoid paying interest. Buyers can save hundreds of thousands of dollars by paying cash instead of taking out a mortgage.
• Having difficulty getting a mortgage: Getting a mortgage isn’t easy when you’re buying a house with bad credit. If your score is under 620, which is the minimum qualifying score for conventional loans, it could be difficult to get a mortgage approval. When you use cash, you can skip this requirement altogether.

Reasons To Get A Mortgage Instead Of Paying All Cash

Sometimes, a mortgage may be a better choice for some buyers. Here are common reasons to get a mortgage instead of buying a house with cash:

• Short on money: Budgeting for a house is hard, and most people don’t have the funds laying around to put down on a house. By putting every last dollar toward the purchase, it can put you at financial risk if there’s an emergency. Real estate is an illiquid asset, meaning you can’t easily access that money when you need it.
• Better to invest: There could be better ways to use that money instead of having it locked into the house. Invest this money to further other financial goals, such as retirement or your children’s college education.

What To Know About Buying A House With Cash

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. Getting to the closing table means simply completing the inspection process and making sure all the title work is in order.

Here are some requirements that must be met when buying a house with cash:

• Financial documentation still required: You need a proof of funds letter to attach to offers in lieu of a preapproval letter. This shows sellers that you aren’t wasting their time and that you have the funds to back up your offer.
• Closing costs still apply: Closing costs don’t only apply to mortgages. You need to pay your share of the closing costs in addition to buying the house with cash.
• Cash due at closing: Once the deal is ready to be finalized, you will need to bring a certified check or cashier’s check to closing.

How To Buy A House With Cash

Buying a house with cash is easier than going through the mortgage process, but it doesn’t mean you just hand over the funds and get the key. Here’s the step-by-step process.

1. Obtain Proof Of Funds From The Bank

Cash buyers must provide a proof of funds letter from a bank when making a cash offer. Talk to the financial institution holding your money and ask if they’d provide a letter stating you’re able to make a cash purchase up to the specified amount. Attach this document with your offer letter.

2. Offer A High Earnest Money Amount

Offer a high earnest money deposit when making a cash offer. Earnest money protects the seller if the buyer decides to back out of the deal. This gives the seller extra reassurance that you’re not going to walk away and that the deal is likely to close. Earnest money funds go back to the buyer once all conditions in the contract have been met.

3. 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 deposit. Always be open and honest with your REALTOR^® when thinking about backing out of a home purchase.

4. Close

Because you aren’t financing the home with a mortgage, the closing process is much quicker. This can reduce the closing time from a month or longer down to a week or two.

When you get to the closing table, bring your ID, a cashier’s check for the purchase price and funds to cover the closing costs.

Pros And Cons Of Buying A Home With Cash

Buying a home with cash has its perks, but there are disadvantages too.

Pros

The biggest advantage of cash is that it’s quicker and easier than a mortgage, but there are other reasons why buyers and sellers prefer all-cash deals.

• More appealing to sellers: Buying a home with cash usually appeals to sellers and benefits buyers. Cash removes lenders – and the mortgage approval process – from the sales transaction. 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.
• No mortgage payments, interest or other fees: Buying a home with cash usually benefits buyers by allowing them to avoid mortgage payments, interest or other fees associated with buying a house.
• Lower closing costs: When you take out a mortgage, the lender will usually add lender fees, an application fee, loan origination fees or discount points to your closing costs. When you pay in cash, you won’t have to worry about paying these fees, which translates into lower closing costs.
• Potential to use delayed financing: 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. Then 6 months after your closing date, you can then qualify for a cash-out refinance which allows you to take out a mortgage for the property and have your cash investment returned to you. Many lenders, including Rocket Mortgage^®, offer delayed financing.

Cons

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.

• May lose liquidity: When you buy a home with cash, you lose liquidity. “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 into 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.
• Miss out on mortgage tax deductions: You could miss out on mortgage tax deductions when you itemize deductions on your tax return. This allows borrowers to deduct interest paid on the first $750,000 of their mortgage.
• Additional expenses still apply: You’ll still need to pay additional expenses, such as homeowners insurance, property taxes, utilities and homeowners association dues. Many lenders pay taxes and insurance on behalf of the borrower through an escrow account. Because there’s no mortgage, cash buyers need to make sure they save for these big payments.

FAQs On Buying A Home With Cash

Here are frequently asked questions on buying a home with cash.

Can you be foreclosed on without a mortgage?

Without a mortgage, you can still be foreclosed on and lose your home if you don’t pay your property taxes. When homeowners don’t pay property taxes, the amount due becomes a lien on the property and the home acts as collateral for the debt. Each state has different laws that specify how long the foreclosure process can take.

How much can you save if you pay all cash?

According to researchers at the University of California-San Diego, cash buyers have paid 11% less to purchase a home over the past 40 years than those using a mortgage. Cash buyers also save a substantial amount in interest. If you were to finance a $300,000 home (using a 30-year fixed-rate mortgage at 6% interest), you’d pay $347,514.57 in interest over that time.

If you have bad credit, do you have to buy a house with cash?

Even with bad credit, buyers can still qualify for certain types of loans. For example, you can still qualify for a VA loan or FHA loan with a credit score as low as 580.

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? Start the process today with Rocket Mortgage.