If you’re shopping for a home, especially in a booming market like this, you may hear of people bidding cash to buy properties in your area. There are many benefits to buying a home with cash, including making your offer more attractive to sellers. But obviously, not everyone can afford that kind of large down payment without the need for financing.
Can you buy a house with money?
Yes, it is possible and perfectly legal to buy a house with money. If someone is selling a property for, say, $250,000 and you have more than that in your bank account, there’s no reason you can’t just write them a check on the spot. .
It is important to note, however, that a cash home purchase does not literally mean a mountain of hundred dollar bills. It simply means that you pay in full, upfront, without financing. While you can buy a house with physical cash, carrying around so many paper bills and dealing with IRS reporting requirements for such cash transactions makes it unrealistic.
Should you buy a house with money?
There are many things that make buying a home with cash appealing, but the most fundamental is peace of mind. If you pay for a house in full, you own it. This means no need for financing from a bank or other lender, no debt and no monthly mortgage bills. You will always have a place to live and there is no risk of missed payments or foreclosures.
Offering to pay cash also makes your offer more attractive to home sellers because they get paid faster, with no chance of a mortgage failing or not being approved. Additionally, eliminating the lender greatly speeds up the closing process.
Advantages and disadvantages of buying a house with cash
There are both advantages and disadvantages to paying cash versus getting a mortgage.
Reasons to buy a house with cash
- No Monthly Payment: Paying off your home in full means you don’t have to worry about rising interest rates or monthly mortgage bills.
- Reduced Closing Costs and Faster Closing: There are many closing costs and delays associated with getting a mortgage. Skipping the loan process speeds up closing and eliminates costs such as origination fees.
- More attractive to sellers in a competitive market: With an offer contingent on financing or the appraisal price, there is always a risk that a loan will fail, leaving sellers to find a new buyer. This makes cash offers more attractive, giving your offer an edge over others.
- Lower purchase price: Since cash transactions are more attractive than those involving financing, you may be able to win a home with a lower offer.
- No underwriting: If you have poor credit or irregular income, you may not be able to qualify for a mortgage in the first place. Cash offers take the guesswork out of whether you will be able to get a loan.
Reasons to get a mortgage instead
- Money is tied up in the house: If you put all your money in your house, it is no longer liquid. This means that you will have less money available if you need it for other purposes. If you want quick access to your money, you better finance.
- Lower return on investment: Real estate can be a good investment. But money tied up in real estate can also be invested in higher yielding investments to earn you more. For example, you might miss higher returns in the stock market if you put all your money in a house.
- No Mortgage Interest Deduction: Homeowners can deduct some of the interest they pay on their mortgage from their income when they file their tax return. If you don’t have a mortgage, you’re missing out on those savings.
Do I still need to have my home inspected?
A cash transaction means you skip the mortgage process. That doesn’t mean you should skip all the due diligence involved in buying a home. Yes, even if you are paying for a home with cash, it is a good idea to have your home inspected. And even if you waive the inspection, you should never skip the final visit. Your real estate agent can help you set up both.
Deferring funding is another option
For the benefits of making a cash offer without having to tie up all your cash in your home, deferred financing could be an attractive choice.
In effect, you pay cash for a property and then get a mortgage after you complete the purchase. It’s like doing a cash refinance after you buy the house. You turn part of the equity into cash that you can use for other purposes and make monthly payments on the balance.
You still need to have enough money up front to pay for the house, which is a downside. However, this strategy allows you to keep your offer attractive while avoiding tying up all your financial resources in an illiquid asset.
At the end of the line
Buying a home with cash can speed up the closing process and make your offer more attractive to sellers, which is a big plus in the hot sellers’ market. However, keep in mind that you are tying up your money in an illiquid asset, so this is not always a good idea.