Buying a house with cash is out of reach for many homebuyers. But if you recently sold a home, inherited money, or made some successful investments, you might have the cash to do so. Cash buyers for a home don’t have to get a mortgage, so they save on interest and can close quickly — an advantage when there’s a bidding war.
Understanding how to buy a house with cash and knowing the pros and cons can help you decide if an all-cash home purchase is right for you.
Can you buy a house with cash?
You can buy a house with cash, but that doesn’t mean you’ll hand a briefcase full of money over to the seller. Rather, buying a house with cash means that you’ll pay for the house with your own money without involving a mortgage lender.
People who have the funds available may choose to buy homes for cash for a variety of reasons:
- They may prefer to bypass the mortgage process and save the money they’d pay in interest over the life of the loan.
- They may want the flexibility to buy a property without worrying whether it will appraise for the contract price.
- Their credit file might not include enough information for them to qualify for a mortgage, known as having thin credit. Buyers who avoid using credit, for example, may have a limited credit history, which can make loan approval difficult.
Owners are happy to sell their home for cash because there are fewer hurdles to getting the deal done. Because cash buyers don’t have to wait for loan approval or an appraisal, they can often close quickly.
Advantages of buying a home with cash
Cash buyers are a relatively small percentage of the total market, accounting for 13% of homebuyers in 2021, according to the National Association of Realtors. That’s up from 7% in 1981. There are many reasons that people who have enough cash choose to buy a home without getting a mortgage.
When you get a mortgage, you have to go through the lender’s approval process. Checking your credit, getting the home appraised, and other steps can take the lender several weeks to complete, so you may not be able to close the deal for a month or more. However, as a cash buyer, you can skip most of those steps.
If you’re a cash buyer for a home, the seller will probably want to verify that you do have the cash available, so you’ll need documentation. And you might want to have the home inspected and appraised to ensure you’re getting a good value. But cash buyers can close the deal in a week or two if they’re in a hurry.
Win bidding wars
In a hot market with multiple offers on the table, sellers often go with the cash buyer for their home. They know there’s less chance of the deal falling through or being delayed. When a buyer needs a mortgage, the deal can get derailed at any step along the way. About 9% of mortgage applications are denied — some simply because the applicant didn’t complete all the paperwork.
Avoid the mortgage process
Avoiding the mortgage process allows buyers to move quickly in a hot market. It also means they can choose to skip the appraisal process, which lenders require. Buyers might skip the appraisal if they want the house badly enough to pay above market value, or if the home needs extensive repairs that would usually endanger loan approval.
However, if you want to ensure that you’re paying fair-market value for the property, you can include an appraisal contingency in your purchase offer, even if you’re paying cash.
No long-term interest payments
Perhaps the most obvious benefit of buying a home with cash is eliminating interest payments. Over the life of a 30-year loan, you could save money on a mortgage — into the thousands of dollars.
Say you bought a $400,000 house with 20% down and took out a $320,000 mortgage with a 4% interest rate. If you keep the loan and pay it off in 30 years, you’d pay a total of $630,080 for the home, including $230,080 in interest.
In addition to interest, you’ll also save on other costs related to getting a mortgage, such as lender fees, an application fee, loan origination fees, or discount points.
Disadvantages of buying a house with cash
Even if you can afford to buy a house with cash, it might not be the most financially sound approach. Consider some of the disadvantages of paying cash for your home before deciding to do so.
Ties up your equity
While having a roof over your head is a basic need, there may be other needs you should save for, such as retirement, your children’s education, or emergencies. If the vast majority of your wealth is tied up because you paid cash for your home, you may not be able to easily access the needed funds if an emergency were to arise, such as an unexpected medical event.
In that scenario, your options might include taking out a home equity loan, which requires a credit check and paying closing costs, or selling your home. In either case, you couldn’t access your money as immediately as you could if it were in a money market fund or other investment.
Missed opportunity costs
If your assets are tied up in your house, you’ve given up the option of using them in other ways that could have had a higher return. Economists call this concept opportunity cost. When you put all your cash into a house, you miss the opportunity to earn a return from investments such as stocks, for instance, because you didn’t have the money to buy them.
Miss out on mortgage tax deductions
Forgoing a mortgage means you’ll have a higher tax bill than you would if you were paying off a house note. That’s because the federal government allows joint filers to fully deduct the interest on their home mortgage as long as the debt is $750,000 or less. (Single filers can deduct interest on mortgages up to $375,000.)
Keep in mind that your tax savings will vary depending on your income tax bracket and the size of your loan.
How to buy a house with cash: Process walkthrough
When buying a house with cash, the homebuying process differs in some ways from it would if you were using a mortgage. Here’s a brief overview of the buying a house with cash process:
- Gather your money in one account. Sell your investments or other property to raise cash, then put the money in one place. Since you don’t need a loan, there’s no prequalification or credit check step needed.
- Get a letter from your bank verifying the funds. When you make an offer, you’ll need to submit the letter to the sellers to prove you’re a serious buyer, not a scam threat.
- Find a home and make an offer. A real estate agent can help with these steps.
- Consider adding appraisal and home inspection contingency clauses. Adding these clauses to the contract will allow you to get a clear picture of what you’re buying. However, there’s no lender requiring either of these, so you can decide if you’re willing to skip them.
- Hire a settlement agent or real estate attorney to handle paperwork and order a title search. In a non-cash sale, the mortgage company may handle these aspects of the process. Still, when buying a house with cash, the closing process is generally simpler overall since you won’t have to deal with all of the documentation that mortgage lenders typically require.
- Prepare your closing funds. You’ll need to bring the total amount owed, including closing costs. Your settlement agent or attorney will tell you whether you need to schedule a wire transfer or bring a cashier’s check to the closing table.
If paying cash for a home is out of your reach, plenty of mortgage options are available. Talk to a local Finance of America Mortgage Advisor today to learn more about what you qualify for.