Real Estate Basics – Page 5 – Real Estate Info Guide

When my friends and I were hanging out the other evening, we were chatting about anything and everything. At one point the talk turned to the process of buying a house, and in particular, whether or not you should buy a house with cash. There were, of course, plenty of opinions but after pulling the point to pieces and researching the subject we came up with a definitive answer. Can You Buy A House With All Cash? Yes, definitely, you can buy a house with all cash. Not only can you do this but, if you are in a position to do so, you absolutely should buy a house with all cash. When you mention to people that you are considering buying a house with all cash there are plenty of people suddenly become experts and will reel off all the reasons why they believe buying a house with all cash is not your best choice. However, when you take a look at all of your options, and the implications of each, it becomes clear that buying a house with all cash is the way to go. Let me share with you why. Cash Doesn’t Talk - Cash Shouts There is a long list of reasons why buying a house entirely with cash is a good idea. The sometimes long-winded process of purchasing can be significantly quicker and smoother when you have the dollars you need to pay for your new property. You will also be able to enjoy your new home without the burden of a mortgage. So. Let me share with you some of the benefits of the cash buyer advantage and you can discover why, when buying properties, cash is king. You Become A More Attractive Buyer The reasons why a cash buyer can be more attractive to sellers, even in a market with low inventory and high demand, are many, but in short: The time from accepting an offer to closing is much shorter with a cash buyer because they do not have to go through the mortgage application process. A cash sale means the home is not part of a chain and the seller will not have to wait until the buyer sells their existing property. There is no risk of the buyer dropping out because they do not have the credit score, deposit or income to qualify for their required mortgage. Lenders are not involved and cannot halt the sale due to the results of the appraisal or home inspection. A cash buyer allows the seller to move on with greater speed, which can be extremely important if the seller wants to close by a particular date. Many sellers say that the number one stressor when going through the house selling process is the waiting time between them accepting an offer, subject to mortgage approval, and the final closing of the deal. Sellers may have to wait for: The potential buyers to receive basic mortgage approval The buyer's mortgage company to commission an appraisal. An appraiser to carry out their valuation of the home in question That information to get back to the mortgage company and the lender to consider how much there are willing to loan the buyers for this particular property. If everything goes smoothly, without any hiccups, this process can take at least 30 days, and that’s during low volume periods. At peak house purchasing times such as the spring, even the most simple transactions can sometimes take from 60 to 90 days or more. This period from offer to closing can be extended for any number of reasons including: Incorrect or missing paperwork An appraisal that is lower than the market value Issues discovered during the home inspection Delays caused by problems further along the home buying chain Holidays, illnesses, or personal issues at the loan company, real estate broker, lawyers or any other professionals in the process. In fact, the list of things that could go wrong for a buyer and a seller when a loan company or bank is involved are almost limitless. I know of one person who had applied for a mortgage with a company whose offices were on the opposite side of the country to where she lived. The offices were closed following a local natural disaster which prevented staff from getting to work and then the building required structural repairs. A hurricane almost 3000 miles away added five weeks to her house purchase. You Avoid A Huge Amount Of Stress While the seller is biting their nails during the mortgage application and approval process, it is no bed of roses for the buyer either. Buying a home is stressful, there is no getting around it. However. When you have the ability to buy a house with all cash it is like waving a magic wand and making all of the drama with the banks or loan companies disappear. You are not beholden to your lender's appraisal or home inspection, and you do not have to sit around waiting for them to make their rulings. That’s not to say you should never bother with an appraisal or a home inspection. What it does mean is that if one of these reports flags a potential issue, the choice to move forward, or not, is yours and not the banks. Not only that but mortgage providers can and do place conditions on their mortgages in order to protect their investment these range from standard conditions such as: The appraisal must exceed a certain value A title commitment Insurance against flood, fire, and other hazards which could damage or destroy the property. Inspections that are common in the area such as radon, water quality, or lead paint. Other common, but non-standard conditions can include: Repairs that must be completed before closing. The paying off of a student loan or other credit product in order to reduce your debt load. While some bizarre conditions have included: One borrower’s occupation was listed as a “homemaker.” The underwriter wanted a Verification of Employment form completed by the employer. A V.A. appraiser wanted a “red colored” room repainted a neutral color. The demand that a single father, who earned in excess of $12k per month, and had full custody of his children, provide proof that he really did have custody and did not pay child support As an all-cash buyer you do not have to stand on the sidelines while someone else makes decisions that affect your life. You do not have to jump through hoops according to a distant mortgage underwriters whims. You get to maintain control. Future Demands From A Lender Are Avoided It is not only during the mortgage application process that a lender can dictate what you should or should not do. One borrower, who had a mortgage with Wells Fargo, was informed he had to raise his home insurance to offset the full replacement cost of rebuilding his home at current rates, rather than enough to cover the current market value. This added $500 to his monthly outgoings. Your Past Doesn’t Have To Dictate Your Future It is not uncommon for someone to run into financial trouble through no fault of their own. For example, a sudden illness can result in huge medical bills while your income dries up because you can’t work. Before you know it you are late paying your bills and you may even be forced to default on a line of credit or mortgage. A blip such as this in your financial history can impact your credit score, and subsequently your ability to borrow money, for many years. This negative moment in your credit history can result in a lender refusing to offer much less than you are actually capable of managing or even declining to extend you a mortgage at all. Not only that. Since the crisis in the financial markets during 2007-08, mortgage underwriters have become much more careful about to whom they will extend credit. In many ways, this is a good thing, but it can mean that now you often have to be the proud owner of: A pristine credit history The kind of credit score only people who do not need credit can achieve A reliable salaried position with an employer With cash in hand, your past stays firmly in the past and doesn't come back to haunt you. There May Be Deals To Be Made As a cash buyer, who can close quickly, you have an ace up your sleeve that could allow you to negotiate a lower price for the property. This is especially true if the seller is in a hurry, has already had a sale fall through due to another buyer's mortgage issues, or in a market with lots of inventory. No Interest, No Mortgage Fees The big, obvious advantage of buying a house all in cash is the money you will save upfront on fees and, over time, in mortgage interest. At today's average mortgage rate of 4.81%, over 30 years you will pay approximately $241,000 in interest on a $250,000 mortgage. In addition, if you have a mortgage for more than 80% of the cost of the property the lender will require you to take out private mortgage insurance. This usually costs 1% of the loan amount, annually. So on our $250K loan, PMI will be $2,500 per year. Then, unless you know how to remove your mortgage insurance, you can be stuck with an extra payment for years. On top of that you can expect: Mortgage application fees - $300 Prepaid interest - $384 Loan Origination fee - $2,500 Title insurance $1,500 Mortgage broker fee - $2,500 So, that’s somewhere in the region of $7,00 to $9,500 in fees, and that's not including appraisals, home inspections, legal fees etc that you may still pay when buying a house with all cash. Save your money and use your cash. A Future Free Of Mortgage Payments Not only will you save money if you can buy a house with all cash, but you could avoid many sleepless nights, not worrying about money. Mortgages payments are the largest single bill most homeowners have to pay each month. If your income takes a hit, and your house is mortgage free, you do not have to fret about losing the property you have been putting your money into for the last, however many years just because of a temporary cash flow problem. This is also an important point to consider for those approaching retirement. The nest egg you have saved for your golden years may be best spent on a home, freeing you from many more years of mortgage payments. What The Naysayers Claim & Why They Are Wrong Of course, there are two sides to every coin and some people swear it is better for you to buy a house with a mortgage, even if you have the cash to buy a house without finance. The main arguments are: You Shouldn’t Tie Up Your Money All In One Place Most financial planners will tell you not to look upon your house as an investment, and that even if you have cash you should still get a mortgage and sink your savings into stocks and shares. This would be good advice for anyone planning to burden themselves with a huge mortgage purely in the hope they will be financially better off in 30 years time and were willing to gamble their money on the stock market. Personally, I have never met anyone who buys a house, with a mortgage, purely as an investment while placing all of their savings in a volatile market that can turn $250,000 into $2.50 in the course of an afternoon. You Don’t Leave Yourself Any Liquidity Liquidity basically comes down to “how fast can I get my hands on my cash if I need to?” The idea that you should leave your cash in the bank, or in a brokerage account, just in case you need it in an emergency, rather than use your cash to buy your home is rather nonsensical. Most people do not have large amounts of cash on hand “just in case” and when you own your home outright, if you do need some money in an emergency not only are you an attractive lending prospect because you have no huge mortgage debt, but you also have a giant asset sitting there to borrow against. The Homestead Exemption Most states have a “Homestead Exemption” which prevents creditors from forcing the sale of a home in order to satisfy their claims. As a result, many financial advisors will use this as another reason why you should have a mortgage. What many advisors do not mention is that this exemption only comes into force following the death of a homeowner spouse and only applies to the primary dwelling. If you have purchased a second or another additional house to flip or rent, the exemption doesn’t apply to that property anyway. Not only that. If you take out a mortgage to buy a home and leave your cash in the bank, or in a financial product, creditors can go after that instead. So, you see, the homestead exemption is not the big reason to take out a mortgage it might first appear. In fact, it is just another non-reason you can safely consider and then move on from. Now that we’ve gone through the pros and cons of buying a house with all cash, there are a couple of other, related questions, my friends and I raised. Can I Use Actual, Physical Cash? One friend had grandiose ideas of going to a closing with a giant duffle bag stuffed full of cash and dumping it dramatically onto the table, atop the paperwork. In theory, you could do this, but just because you could do something doesn’t mean you should. Just think of all of the logistical problems of getting together $250,000 in cash, counting it, bundling it up and carrying it to the closing. Not to mention the safety issues of carrying around huge amounts of cash and how incredibly unimpressed your seller is going to be at the thought of having to sit there, count out all of that cash to check it’s all there and then get the money safely to their own bank. The idea might be fun, but the reality? Don’t do it. How Does A Cash House Purchase Work? So, how can you buy a house with all cash if actual cold hard cash is off the table? First of all you need to ensure all of your funds are in one place. If you have cash from different sources or in a variety of financial institutions you should move it all to one account well ahead of your closing date. This gives you time to deal with any hiccups in the process. It also allows you to provide a simple proof of funds if this is requested by the seller. Checks As long as you have made sure there is enough in your chequing account to cover it, using a personal check is fine. You will most probably be asked to write one check as a deposit during the negotiation process, another at closing for the remainder of the purchase price and a third for the closing costs. If you decide to use a personal check, let the seller's team know ahead of time because they may have issues over the time it takes for a personal check to clear. For example. Your seller may not be able to close on the purchase of their new property until the funds from the check you have given them has cleared and this can influence their moving out date. You might also want to give your bank a heads up that a large withdrawal is about to be made from your account. For an additional layer of security, you can find out ahead of time the exact amounts you will need at closing and obtain cashiers checks for each payment. Wire Transfers Just like a cashiers check, a wire transfer ensures the seller has access to their money immediately. It is also more convenient for the seller because they do not need to physically go and deposit a check into their account. Do Many People Buy A House With All Cash? According to a 2017 report, 29% of single-family home and condo sales were made up of all cash sales. This may come as a surprise to many, but it doesn’t mean there are armies of super-rich house buyers out there. Some all-cash buyers are retirees who have been mortgage free for a while and have the cash from the sale of their home, or are downsizing and can use the equity from a larger house to fund the cash purchase on a more manageable home. Other cash buyers have saved hard or built up enough equity in their existing home to manage an all-cash offer, or may have come into an inheritance. About The Author Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate. Check out the Full Author Biography here. This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policy.