Can You Buy a House Outright With Cash?
Yes, you can buy a house with cash, as long as you have the money to do it.
The mortgage industry has changed since the subprime housing bubble exploded in 2007. It’s gotten harder to get a mortgage. The buying lifecycle can drag on and on. Approvals get reversed without warning, right up until days before the closing.
Still interest rates are incredibly low for qualified buyers. If you have enough cash to buy a house outright – chances are good you’re a qualified buyer.
Why Use Cash to Purchase a House
There are plenty of reasons for buying a home without a getting mortgage. Here are just a few of the reasons why cash is still king.
1. Front of the line
Sellers LOVE cash deals. When you make a cash offer – you jump to the front of the line. This is a big advantage in areas where housing is competitive. Urban centers and surrounding suburbs are highly competitive in many states. Prices tend to be higher but more importantly, available homes tend to be scarce. The available homes in these areas go up for sale on a Friday and are sold by Tuesday.
Here’s a nice little tip. If you need a mortgage, your lender needs an appraisal. That takes at least one business day. Cash offer – no appraisal required. Cut ahead of the line.
2. Money talks
If you’re looking to get the best price, cash makes the selling price a lot more negotiable. Show your offer is liquid and available on-demand – it beats waiting for a mortgage to be finalized. Not to mention, pre-approvals can change right up to the day you’re scheduled to close.
If you want to sell your house fast – a cash offer clears the way. No headaches, no hassles. Dump that check in the bank and think about how to avoid the tax on capital gains.
3. Bye-Bye bank
As long as you have a mortgage, it’s not really your house – it belongs to the bank. If something bad happens, they can take it back, no matter how much you’ve paid into it. Ask the people who went through foreclosure during the 2008 recession.
Not having to bother with 15 or 30 years of monthly payments is a definite pleasure. It’s also a big plus for your debt-to-income ratio and you can’t get upside-down on a house you already own.
4. No interest payments
A mortgage accrues interest – it’s a simple loan. Your payments go to the interest first, then the principal. The longer the term of your loan, the more interest you pay. Assume you paid a $20,000 down payment and got a mortgage for $230,000, fixed-rate at 4%. That 30-year mortgage would cost $395,300, a 15-year $306,231. The house cost cash buyers $250,000 – $145,000 less than the 30-year mortgage.
5. Cut the closing costs
There is no escaping closing costs but a cash buyer can reduce them. With a mortgage, closing costs include loan origination fees, appraisal costs, and commissions. Depending on where you’re buying – closing costs are no cheap date. When you pay cash, buyers can save big money at the closing.
Steps for Buying a Home with Cash
Here’s a quick how-to on buying a house with cash. As long as you have the money, it’s pretty simple. Remember, houses come in all sizes. Find the one you love and get the details nailed down.
Pull the Money together
It’s doubtful you have $100,000 + sitting in a checking account. The first thing you do is pull the money together so it’s immediately accessible. You may want to do it before you start house hunting. If you’re buying in a competitive market, don’t lose out on a house because you have to sell some stock.
Proof of Funds
Don’t expect a seller to take your word for it about the cash. If you’re smart, you’ll get a proof of funds letter from your bank. Wherever you put your money, the seller should be able to confirm the amount. All it should take to meet the offer is a cashier’s check.
Remember one of the advantages for the seller is a fast turnaround. It can take three weeks or a month to get a mortgage closed. A cash deal can be completed in a week.
Find a Realtor
You need a real estate agent. A good one. The value of a realtor isn’t just access to listings – it’s community expertise. Location is critical to home value. A long commute can be tiresome. If the neighborhood is iffy or the schools aren’t great – the resale value won’t be there. You can fix almost everything about a home except for where it sits.
Realtors are hooked up to the housing market. When they’re clear about what you’re looking for, a good real estate agent can shorten your search. They know if the home is fairly priced and have inside info on the neighborhood. They sometimes hear of houses coming available before they hit the market. In competitive markets – that’s a huge advantage.
Realtors like cash buyers almost as much as sellers. Fees for the realtor services are included in closing costs. When they work with a cash buyer, real estate agents get their money much faster than a deal with a traditional mortgage.
Make an Offer
Shop around as long as you want, but once you find the right property, make an offer. This is another place where paying cash can come in handy. It puts you in a great position to negotiate on price. How anxious is the seller to complete the deal? Do they already have an offer on another home?
Cash in hand will be more attractive. If you can knock some money off the price, that’s good too. The realtor should have a feel for wiggle room on price. Provide the realtor with your proof of funds letter and make your offer.
An appraisal isn’t required for a cash deal, but don’t buy blind. You can add an inspection or appraisal contingency to your offer. If that’s your plan, line up the inspector before you make the offer. With cash buys, the contingency doesn’t typically require repairs. It’s a mutual agreement to walk away from the deal.
Once your offer is accepted, a title search is done before the closing. It’s not like the title to a car – which is an actual document. A title search on a property is a collection of data from searching public records.
A title search reveals liens, unknown easements, or permit/filing improprieties. It may show conflicts in ownership. Your realtor will have a relationship with a title search firm to do the work.
Talk to the realtor about what additional monies are needed to close the deal. Those are for the commissions or fees of people who worked on the home purchase. Bring your checkbook to pay them separately and be prepared if something else pops up.
Get a cashier’s check or set up a wire transfer for the payment. There’s no long mortgage document to read through. There should be a standard contract for the purchase. It might be smart to bring a real estate attorney to look things over.
The seller must transfer the deed to the buyer and the buyer must provide payment. The transfer is important – the seller probably still owes money on the mortgage. Once those tasks are completed, the seller provides that the keys and the buyer takes ownership of the home.
The Cons of Paying Cash
There are a couple of cons when paying with cash. Hard to think they outweigh paying with cash.
1. Eggs in one basket
Buying a house with cash ties up a good portion of your money. Maybe most of your money. Or if an economic disaster hits, you have little or no way to respond. Real estate is not particularly liquid. If you need to sell the house (ask for cash) it can take a minute. Another reminder to build an emergency fund.
You also might consider opening a line of credit while you’re flush. Home equity loans are determined on…wait for it – the amount of equity you have in your home. Depending on your situation, you should be a shoo-in for a loan.
2. Single Asset Investment
Because mortgage rates are so low, paying cash for a house could actually cost you money. If you invested the house money in stocks or an index fund, it would earn more than mortgage interest costs you. You’d need to let the investment mature, but here’s the deal.
If you never put in another nickel, after 30 years at a 5.2% return, you’d have $1,143,963.
3. Lots of Cash = Suspicious Transaction
You know you’re not a criminal mastermind, but does the federal government? Once you start accumulating cash and pulling the money together, you may catch their eye. Any financial transaction over $10,000 is automatically reported to the IRS. If you start withdrawing a bunch of cash or depositing large amounts of cash – it looks unusual…aka suspicious.
In this circumstance, “cash” means buying a house without a loan. It doesn’t mean bills and coins. As you pull your house fund together, circulate it in the system. You may want to create a new separate account for homeownership. When you transfer money electronically, there’s a trail. Talk to your bank or your accountant for the best advice, then follow it.
In Closing: Buying a House with Cash
In our opinion, the pros of paying cash far outweigh the possible cons. Real estate doesn’t produce as much of a return as the market, but it’s more consistent. People always need housing. The stock market can fluctuate wildly, but residential housing is always in demand.
One of the biggest benefits of cash homeownership is insulation from the actions of third parties. Banks and mortgage providers set in motion the devastation of the global economy in 2007. Between 2007 and 2010, approximately 3.8 million people lost their homes to foreclosure. The majority of homes were lost due to bad decisions by bad actors in the banks and lending industry. People who had been paying into their homes for years found themselves on the street.
When someone else owns the paper on your home – i.e. bank or mortgage company – they will look after their interests. Not yours.
Mortgage payments take up the highest percentage of family expenses. When you don’t have to lay out that money every month, it opens up opportunities. If you have a good salary, investment is still an opportunity. Max out your retirement account. Flush out your kids’ college fund. Rebuild some liquidity with a high yield savings account. Invest in a REIT or an index fund. You don’t need tons of cash to let your money make money.
If you can afford to buy a house for cash, you don’t have to worry about losing it. It seems obvious, but that concern can be a burden. Anyone who’s gone through financial trauma lives waiting for the next shoe to drop. Talk to your family and see how they feel about buying a house with cash.
It may be the first and only time you truly own your own house.
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