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All-cash home purchases are a regular feature of today’s housing market, especially for those buying a second home or an investment property. According to the National Association of Realtors, 26% of purchases of existing homes in November 2022 were cash sales.
Given that the housing market remains competitive, combined with high interest rates and an onerous mortgage approval process, the idea of making an all-cash offer on a house can sound very appealing. But it’s important to understand what this process entails, and the situations where it might make sense to pay all cash.
What Is a Cash Offer on a House?
If you have significant financial resources via your own personal wealth, the sale of assets (such as your previous home) or a cash-out refinance, you could make an offer on a home without needing a mortgage. By making an all-cash bid on a house, you’re offering to pay the purchase price out of your own pocket.
Cash offers tend to be viewed more favorably by sellers because the buyer won’t need to be approved for a mortgage as a condition of the purchase. The deal can also close much faster and there are fewer fees involved.
What To Consider Before Buying a House With Cash
Making an all-cash offer on a house is no small endeavor, especially as home prices remain high. Take stock of the following factors before making such a massive financial commitment.
Your Current Financial Situation
Before buying a house with cash, take the time to assess your finances. There will be no lender evaluating your debt-to-income (DTI) ratio, so it’s up to you to confirm that you will have enough cash left on hand for:
- Regular monthly expenses like utilities, homeowners insurance and HOA fees
- Property taxes
- Six months’ worth of emergency funds
- Home maintenance
- Moving costs
- Necessary upgrades or renovations
Your Financial Goals
Be certain that buying a house with cash aligns with your other financial goals, especially in contributing to your retirement. Are you sinking all your money into an all-cash home, or will you still be able to save and invest in retirement accounts?
Tax Implications
Paying all cash for a property means you won’t have a mortgage loan and the accompanying interest payments. However, this also means you can’t claim the mortgage interest deduction to lower your tax bill.
Future Loans
If you plan on applying for a mortgage—purchase or refinance—or personal loan in the future, buying a house with cash means less money will be available for a down payment or to help with repayments.
Alternative Investments
Compare buying a house with cash to other assets you can buy. How does the risk of each investment compare to the potential rewards? Talk to a financial advisor or wealth manager before making your decision.
How To Buy a House With Cash
Once you have decided to buy a house with cash, follow these five steps.
1. Prepare Your Money
Make sure your money is consolidated into a centralized place before putting in your bid. If your funds are scattered across accounts, getting a headstart is advisable. Bear in mind that if you’re using money from a retirement account, you may have to pay added taxes or penalties.
2. Get a Real Estate Agent
Find a real estate agent who has experience negotiating all-cash home purchases. They could be a valuable asset in deciding what your opening bid should be and in the subsequent negotiations with the seller.
3. Get Proof of Funds
Normally when making an offer on a house, you use the mortgage preapproval letter from your lender to give credence to your bid. When you’re buying a house with cash, however, you won’t have that. Instead, you can ask your financial institution for a proof of funds letter to prove that you have the amount needed to buy the house.
4. Negotiate the Sales Price
A cash offer can be more appealing to sellers because it’s less likely to fall through, compared to a potential buyer that still needs their lender to sign off on the purchase. Use that, and the promise of a quick closing, to negotiate the best price.
5. Prepare to Close
Have the final amount ready in the form of cashier’s checks or schedule a wire transfer at the closing. Your bank can arrange either option, but most banks have a limit on the amount of money that can be wired online. If the amount exceeds its threshold, you’ll have to visit a local branch to arrange the wire transfer. You might also have to pay a fee.
Make sure you have the seller’s banking information. It could also be a good idea to purchase owner’s title insurance so you’re financially protected against any liens or ownership claims to the property after the purchase.
Do Your Due Diligence
If you decide to buy a house with cash, there are steps you can take to make sure it’s a wise purchase and gain information to determine what price you are willing to pay. This includes:
- Hiring a title company to conduct a thorough search of public records to ensure there are no liens and financial encumbrances.
- Ordering an appraisal and home inspection to determine the property’s value and identify if it needs any major repairs or upgrades.
- Hiring a land surveyor to verify the property lines.
Pros and Cons of Paying Cash for a House
Buying a house in cash will probably be the largest purchase you’ll ever make. Carefully consider the risks and benefits before committing to this strategy.
Pros
- Sellers often prefer all-cash offers over buyers with mortgage financing.
- You won’t have monthly payments or interest fees to worry about.
- The absence of costs like mortgage origination fees or lender’s title insurance makes closing cheaper.
- Not working with a lender means you can close faster, and the process is much more straightforward.
- Paying cash for a house means you own the property outright.
Cons
- Depending on your circ*mstances, you may tie up a lot of your money in a highly illiquid asset, meaning you can’t turn it into cash quickly. This could be a problem in the event of an unforeseen financial emergency.
- Making such a significant expenditure might impact your ability to cover other expenses going forward, such as homeowners insurance, utility bills, HOA fees and general home maintenance.
- You don’t get the mortgage interest deduction when you file your taxes, and you’ll still be responsible for paying your property taxes.
- There may be better ways to invest your money than a house, and purchasing other asset types could offer higher returns in the long run.
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