Buying a House With Cash: What to Know Before Skipping the Mortgage
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About a quarter of home buyers pay cash instead of getting mortgages these days. But is buying a house with cash the smart thing to do?
The answer depends on your goals. If you want to buy a house with cash to avoid paying mortgage interest, you should consider how much that money could grow if you invested it instead. If your goal is to beat other bidders for a home, buying with cash will attract the seller’s attention. You’ll still need to make a competitive offer, though.
Before you commit to buying a house with cash:
Identify what you hope to gain by making a cash purchase.
Don't assume that cash is better.
Consider how you might benefit by getting a mortgage instead.
Congratulate yourself for having a big bank balance!
How to buy a house with cash
Buying a house with cash is mostly the same as buying one with a mortgage, with the giant exception of not having to apply for a loan and all the paperwork it involves.
After your offer is accepted, you'll make an earnest money deposit, make sure a title search is done, conduct a final walk-through and go to a closing, where you'll sign documents to transfer the property. You might conduct a home inspection and hire an appraiser.
Though you won't have to supply information to a lender, you'll be expected to supply information from a financial institution.
"One thing a cash buyer will need to do is provide evidence of the available funding within days of an agreement, if not prior to signing a contract," says Tomas Satas, a real estate agent, real estate investor and CEO of Windy City HomeBuyer in Chicago. Also known as a proof of funds, this evidence could take the form of a bank statement or a letter from a financial institution.
Satas adds that you shouldn't skip due diligence just because you can. "Cash buyers mustn't skip important details like inspections, surveys and title insurance," he says. "A good attorney that doesn't let these things fall through the cracks is vital."
It may feel satisfying to buy a house with cash, but it's not necessarily the optimal choice for everyone who can afford to do it.
» MORE: All the steps to buying a house
Reasons to buy a house with cash
You don't want to pay interest
A mortgage is expensive. On a $300,000 mortgage with an interest rate of 6%, you'd pay almost $348,000 in interest over 30 years. When you pay cash for a home, you avoid paying all that interest — not to mention going into six-figure debt.
Buying a home with cash doesn’t eliminate recurring expenses. You'll still owe property taxes and, if you're wise, pay for homeowners insurance. But you can take the money you would have spent on monthly mortgage payments and save it for retirement or emergencies (or spend it).
You're competing against other buyers
Sellers know that lots of things can go wrong while a lender is processing a mortgage application. Buyers sometimes mess up their credit, lose their jobs and don't submit paperwork on time. Lenders misplace paperwork and make mistakes.
Some sellers may favor cash buyers to avoid these problems and delays.
Another advantage of paying cash: You can close sooner. Cash buyers often can take ownership in two weeks or less, whereas it often takes four to six weeks to close on a mortgage. When a seller is in a hurry, a cash buyer might have a competitive edge.
You don't want to be at the mercy of an appraisal
Cash buyers have the ability to skip or ignore an appraisal. Mortgages, on the other hand, require appraisals. If a home appraises for less than the price, the lender may expect the borrower to come up with cash equal to the difference between the appraised value and the price — in essence, a bigger down payment. If the borrower doesn't have enough cash on hand, the deal will fall through unless the seller reduces the price.
You find it hard or impossible to get a mortgage
Sometimes it's difficult to qualify for a mortgage. For example, some buyers may be stymied by a thin credit file, which means they don't have enough information in credit reports to generate a credit score, which is necessary to get a mortgage. A thin credit file may befall immigrants, citizens who moved back to the U.S. after living abroad for many years, people who avoid using credit, newly single people and those who have been incarcerated.
You can bulk up a thin credit file, but it takes time. Meanwhile, if you're in a hurry and have the money, you can buy a home with cash.
Reasons to get a mortgage instead of buying with cash
You'll come out ahead by investing the money
In many cases, getting a mortgage is the rational course. There might be more productive ways to use the money, even if you have enough cash to pay for a house outright.
"What would you do with the money otherwise?" is what Nick Holeman, head of financial planning for online financial advisor Betterment, asks cash buyers.
When you spend cash on a house, you're not investing it for retirement or your children's college expenses. By investing the money in a tax-favored, diversified portfolio, you could outperform the rate on the mortgage, Holeman says.
"Don't sacrifice your other financial goals to make an all-cash purchase," Holeman says. "If you are adamant about making an all-cash purchase and you can't do so without dipping into your retirement accounts and your emergency fund and your kids' college fund, well, you're buying too big a house."
You'll need the cash for other things
You are likely to have unexpected expenses and reductions in income over the years. Roofs leak, water heaters break, employees get laid off, people fall seriously ill. Cash is handy when these things happen.
Get a mortgage if paying cash will leave you without a healthy emergency fund.
Don't assume cash is better
Most sellers are looking for the best price and terms, said Tricia Lee, a real estate broker in the Brooklyn borough of New York City. Mortgage borrowers can win bidding wars by offering more. Don't expect a cash discount.
"Buyers shouldn’t think that cash will automatically land you a better price, because often it does not," Lee said by email.
In fact, cash offers are so common now that they aren't as competitive as they were two years ago.
"The cash-heavy, savvy investors are out there, and yes, their offers may look more shiny to sellers, but [borrowers] should not be discouraged because there are still so many other ways to win," she said. "It's all cash at the closing."
» MORE: Are cash offers always best?
