Cash in king and in real estate, it’s no different. A cash offer is a bid on a house that is all cash and requires no mortgage loans. Sellers like cash offers because they typically result in quicker closing times, and there is no risk of losing financing. Read on for the details you need to know about cash offers.
How does a cash offer impact the homebuying process?
While an all-cash real estate process is similar to the real estate process that involves a mortgage, there are also differences. Below are the most common ways a cash offer differs from an offer that requires financing:
- Faster process – since there is no mortgage application, underwriting or appraisal, the process can be more immediate than when there’s a mortgage involved. Cash offer buyers will still need to provide proof of funds, obtain insurance and sign the closing documents.
- Fewer contingencies – Cash offers can come with fewer contingencies than offers that require financing. This is because cash buyers typically aren’t dependent on selling a home to move forward with the purchase. However, cash buyers will still likely require an inspection contingency.
- An appraisal isn’t required – During a mortgage-financed home sale, the lender requires a home appraisal. If there isn’t financing, a cash buyer may choose not to conduct an appraisal.
- Less closing paperwork – While there is still paperwork to sign, significantly less paperwork is involved in a real estate transaction that doesn’t require financing. Additionally, the closing costs are lower since there are no lender fees.
- Proof of funds letter – When buyers financing the purchase make an offer, they will have an approval letter from the lender. However, cash buyers need to have a letter from the bank to prove that they have the financial means to purchase the house with all cash.
Why make a cash offer?
As with any purchase, there are advantages and disadvantages to cash offers. And, just because you have the cash to make a cash offer comfortably doesn’t always mean this is the right choice.
Pros of cash offers:
- Results in a faster closing period
- The buyer doesn’t have to make ongoing interest payments
- A cash offer will stand out, especially in competitive markets
- There is less paperwork involved
Cons of cash offers:
- The cash becomes tied up in one asset, making it difficult to access if you need liquidity
- There aren’t any mortgage tax deductions
What do cash offers cover?
Cash offers cover the purchase price of the home. When making a cash offer, it’s essential to account for the additional costs of buying a house. Ernest money, homeowner’s insurance, property taxes, moving expenses, HOA dues, and more require cash payments. There should be enough cash available to comfortably cover these costs while still keeping enough money for maintenance, repairs and any additional cushion.
