In some areas, there simply isn’t enough desirable housing available for the number of interested buyers—and, in these hot spots, buyers will likely find the market to be quite competitive. One way a determined buyer could increase their chances of getting their house of choice is to pay in cash; in general, this can give the buyer stronger negotiating power.
According to a recent “REALTORS® Confidence Index” survey , 23% of home sales in February 2019 were cash deals. Even one year ago, cash deals made up 24% of home sales, which seems to indicate that, for now, nearly a fourth of home sales are being managed without a mortgage.
The first question to ask yourself is whether you could potentially afford to write a check for your new home. If the answer is no, then your option would be to finance your house—just like three-fourths of the homebuyers today.
If, however, paying in cash is a possibility, then consider these pros and cons of cash versus mortgage.
Pros of Buying a House With Cash
There are clear benefits to paying cash for your home. For one, you can more effectively compete with investment buyers who are able to plop down cash for properties of interest. Plus, you may be able to negotiate a better deal with your seller.
The seller may consider you a more appealing buyer because there is no concern about the deal falling through due to a mortgage loan application being denied. If your seller has already had that happen before, it’s possible you’ll be perceived even more favorably.
You won’t have a monthly mortgage payment to put in your budget, which can feel quite freeing. And, you can skip over the mortgage approval process, reducing some of the costs typically associated with the loan transaction, such as private mortgage insurance.
As another consideration, buying with cash allows you to purchase a home that, for one reason or another, is not considered lendable. Once you make necessary improvements on the house, and when the time is right, you can apply for a cash-out refinance to potentially get some money back out of the property.
With cash, everything usually moves along more quickly. When you use a mortgage loan to buy a home, you’ll typically have to wait for the loan to be underwritten, for the property to be appraised, for a title search to take place and show a clean title, to deal with insurance requirements and more, so the lender can be sure the collateral being used for the loan is solid.
When you buy a home with cash, you may be tempted to skip the home valuation (appraisal), but that’s not typically recommended because you’ll want to know the value of the home you’re buying. You may still want to obtain Owners Title Insurance to be sure that the property has clean title to transfer, otherwise these undiscovered issues could come back around when you go to refinance or even sell the home in the future.
Cons of Buying a House With Cash
Drawbacks also exist when using cash. For example, you won’t be able to deduct your mortgage interest if you itemize your federal taxes. Depending on what you’d pay in interest, and what your tax bracket is, this may be a significant consideration. It’s a good idea to consult with your tax advisor on cash vs a mortgage before making any commitment.
Also, think about whether you could invest the dollars you earmarked for the house purchase at a higher rate of interest than what you’d pay in mortgage interest.
If you purchase your house with cash and this takes a big chunk of your savings, you might not have the money you’d need for home improvements, or unexpected expenses.
Plus, a hallmark of savvy investing is that you diversify your portfolio. If you put most of your cash into your house, that’s just one asset—the opposite of diversification.
One option would be to cash out so that you can invest in more diverse ways, however, there may be waiting periods on this transaction or limits on how much cash you can get out of the home.
Pros and Cons of Getting a Mortgage Loan
With a mortgage, you can, more or less, reverse the pros and cons of buying a home with cash. You’re likely at a disadvantage, for example, if cash buyers are interested in the same property, then it may come down to offer price and other concessions.
When sellers mull over their cash offers versus their mortgage offers, they will probably see the advantages of not having a buyer that needs to go through the mortgage process.
This transaction will probably take more time to complete, and you’ll have a monthly mortgage payment to budget. But, you may be able to deduct mortgage loan interest, perhaps have more opportunities to diversify your investments, and not have all your cash tied up.
Have you heard of delayed financing? This is one way to combine the benefits of cash and mortgage home buying. In short, it’s a way for you to buy a house with cash but then quickly refinance the property (within the first six months) to get some of your cash investment back. The cashout amount can vary from loan program to loan program and other factors. This route gives you the advantages of being a cash buyer, but the ability to regain some of your sacrificed liquidity.
There are specific eligibility requirements; for example, lenders generally require that the purchase was an arm’s length transaction. This means that the buyer and the seller are acting independently and do not have any relationship with one another outside of this transaction. This stipulation is included to help ensure that each party is acting without pressure from the other, with both of them usually having access to the same information about the deal.
You may also need to show the lender a copy of your settlement statement showing that the home was purchased with cash; a title report showing that you are the owner and that there are no liens on the property; and proof that your own funds were used to make the purchase (no borrowed, gift or business funds). There may be other eligibility requirements, depending on different factors such as the lender, type of loan, property or location..
Obtaining a Mortgage
If you’ve decided that buying a house with cash is not doable or practical, then you’ll need to know how much you can afford to borrow. Defined another way, you’ll need to know how much a lender would be willing to loan you. Traditionally, buyers put 20% down on their new homes, although that’s not always realistic given today’s home prices.
So, even if you’re not paying for the entire home with cash, you’ll still need to consider how much money you have saved, and whether it’s enough for your down payment, any applicable closing costs, moving costs, any home repairs, and so forth. Plus, when qualifying for a mortgage, lenders will review things like your credit report, employment history, earnings, assets and debt, to make sure you can meet your mortgage payment obligations.
Once you’ve gone through the process of borrowing your first mortgage, you may feel a (much deserved) sigh of relief. Navigating the mortgage borrowing process can be overwhelming, but it can be well worth it once you’re able to transform your new house into a home.
But depending on the terms of your loan, mortgages can be repaid over varying life spans, frequently anywhere from 15 to 30 years. A lot of life can happen in that time and it might be helpful to know you have options should circumstances change.
One option to consider is refinancing your mortgage, which could potentially allow qualifying borrowers to secure a lower interest rate or preferable loan terms when refinancing. There are no hidden fees when you refinance your mortgage with SoFi and you’ll have access to qualified Mortgage Loan Officers who can assist you throughout the application process.
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