If you’re shopping for a home, especially in a hot market like this one, you might hear about people making all-cash offers to buy properties in your area. There are many benefits to buying a house with cash, including making your offer more appealing to sellers. But obviously, not everyone can afford that kind of large upfront payment without the need for financing.
Can you buy a house with cash?
Yes, it is possible and perfectly legal to purchase a home with cash. If someone is selling a property for $250,000, for example, and you have more than that in your bank account, there’s no reason you couldn’t offer to simply write them a check then and there.
It’s important to note, though, that a cash home purchase doesn’t literally mean a mountain of hundred dollar bills. It just means you’re paying in full, upfront, with no financing. While you could buy a home with physical cash, carrying that many paper bills and dealing with IRS reporting requirements for such large cash transactions make it not very realistic.
Should you buy a house with cash?
There are several things that make buying a home with cash appealing, but the most basic is peace of mind. If you pay for a home in full, you own it outright. That means no need for financing from a bank or other lender, no debt and no mortgage bill each and every month. You will always have a place to live, and there’s no risk of missed payments or foreclosure.
Offering to pay with cash also makes your offer more appealing to home sellers, because they get paid faster, with no chance of a mortgage falling through or not being approved. In addition, eliminating the lender speeds up the closing process considerably.
Pros and cons of buying a house with cash
There are both advantages and drawbacks to paying cash compared to getting a mortgage.
Reasons to buy a house with cash
- No monthly payments: If you pay for your home in full, that means you don’t have to worry about rising interest rates or monthly mortgage bills.
- Lower closing costs and faster closing: Many closing costs, and delays, are related to securing a mortgage. Skipping the loan process makes closing proceed faster and eliminates costs like origination fees.
- More attractive to sellers in a competitive market: With an offer contingent on financing or appraisal price, there’s always the chance a loan could fall through, leaving the sellers to find a new buyer. That makes cash offers more attractive, giving your bid a leg up on others.
- Lower purchase price: Because cash deals are more appealing than ones that involve financing, you might be able to win a home with a lower offer.
- No underwriting: If you have poor credit or irregular income, there’s a chance you won’t be able to qualify for a mortgage in the first place. Cash offers let you avoid the uncertainty of whether you’ll be able to secure a loan.
Reasons to get a mortgage instead
- Money is tied up in the house: If you put all of your cash into your home, it’s no longer liquid. That means you’ll have less cash available if you need it for other purposes. If you want quick access to your money, you’re better off financing.
- Lower return on investment: Real estate can be a good investment. But money tied up in real estate might also be invested in higher-yield investments to earn you more. For example, you might miss out on higher returns in the stock market if you put all your cash into a home.
- No mortgage interest deduction: Homeowners can deduct a portion of the interest they pay on their mortgage from their income when filing their tax return. If you don’t have a mortgage, you miss out on these savings.
Should I still get a home inspection?
A cash deal means you’re skipping the mortgage process. It doesn’t mean that you should skip out on all of the due diligence involved in buying a home. Yes, even if you’re paying for a home with cash, it’s a good idea to get a home inspection. And even if you waive the inspection, you should never, ever skip the final walk-through. Your real estate agent can help you set up both.
Delayed financing is another option
For the benefits of making a cash offer without having to tie up all of your money in your home, delayed financing might be an appealing choice.
In effect, you pay cash for a property, then get a mortgage after completing the purchase. It’s similar to completing a cash-out refinance after you purchase the home. You turn some of the equity into cash you can use for other purposes and make monthly payments on the balance.
You still need to have enough cash upfront to pay for the home, which is a drawback. However, this strategy lets you keep your offer appealing but avoid tying up all of your financial resources in an illiquid asset.
Buying a home with cash can speed up the closing process and make your offer more appealing to sellers, which is a big plus in a hot seller’s market. However, keep in mind that you’re tying your money up in an illiquid asset, so it isn’t always a good idea.