What are Cash Offers on a House and How Do They Work?
The majority of people buying a home will require a lender to give them a mortgage to cover most of the cost of that home. But perhaps you have heard the term “cash offer”? If you picture someone showing up with a suitcase full of cash to buy a house, you’re not entirely wrong. While it tends not to be delivered in a suitcase, a cash offer on a house simply means that the buyer can pay in cash for the house and does not need a mortgage.
How many people can actually finance their home without a mortgage? More than you may think. In 2021, 30% of the homes bought were paid for in cash. This trend is due to the fact that people who can afford it are choosing to move to more affordable areas of the country, particularly since working virtually is so much easier.
What Does It Mean to Make a Cash Offer on a House?
Let’s take a closer look at what a cash offer on a house is. Essentially, a buyer who makes a cash offer can pay the entire cost of the house outright, without the need for a mortgage or other financing. They avoid the mortgage application, documentation process, underwriting, and appraisal that most sales require.
Where does the money for a cash offer come from? There are numerous ways a buyer can get the cash for the purchase of a home, such as:
- Significant savings
- An inheritance or trust
- Equity in a current home
- The sale of a business
Now, back to the suitcase. Instead of delivering the entire purchase price in cash and handing it over, the purchase is generally made with the use of a cashier’s check or wire transfer that is sent to the title company at the time of closing, with earnest money still put down as a deposit.
Of course, to finalize the offer, you will need to be able to prove you actually have the funds to pay for the house. This can come in the form of a letter of endorsement from your bank and a copy of your bank statements.
Benefits of a Cash Offer on a House
There are several benefits to making a cash offer on a house. First and foremost is the fact that you can beat out your competition in today’s highly competitive market. In 2021, there were 21% fewer homes on the market than in 2020, making it harder to buy by pushing the average sales price of homes up. If you can pay for your home in all cash, rather than having to qualify for a mortgage, you have a distinct advantage over other buyers.
Other advantages of making a cash offer on a house include:
- No monthly mortgage payment
- Fewer contingencies
- A faster closing
- The possibility of paying a lower price for a home
- Lower closing costs
- Easier closing process
- Freedom to shop around for a title and escrow company
- No need to worry about your credit
- No need for mortgage insurance
In addition, sellers often like the ideal of a cash offer because it’s less likely that the sale will fall through due to financing issues. It can be a win for both the buyer and the seller.
How to Make a Cash Offer on a House
When making a cash offer on a house, follow these steps:
- Find a home you want to buy, with the help of a real estate agent.
- Make an all-cash offer.
- Negotiate and agree on a purchase price.
- Show proof of funds for the purchase price of the home.
- Get a professional home inspection and appraisal done (not required because there is no lender, but still highly recommended to protect your investment).
- Establish contingencies, if any, and sign the offer or sales contract.
- Deposit your earnest money into an escrow account held by a title company.
- Get the title report to ensure you will receive a clean title at closing.
- Deposit the remaining cash required for the sale into the escrow account, which will be transferred to the seller at closing. At this time, the ownership of the home will be transferred to you.
Keep in mind that with a cash sale these steps can all happen within just a few days. Be ready to keep up with the process.
Should You Make a Cash Offer on a House?
Ultimately, the decision is yours. But if you can afford to pay cash for a new construction home or a resale home, it may increase your chances of getting the home of your dreams. It’s true that you will tie your cash up in your property, meaning it’s not liquid and isn’t available at the drop of a hat, but it also means no mortgage, no interest and full home ownership from day one.
Just keep in mind that you will need more cash than just the purchase price. You will need the earnest money, property taxes, home insurance, and moving expenses, so be sure you have enough cash to cover those expenses as well.
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