It’s a seller’s market right now in real estate, meaning if you’re ready to sell your home, now’s the time. If you’re looking to buy a home, you’ll need to be competitive.
One way to make your home bid stand out is by paying with an all-cash offer instead of a mortgage.
Why is a cash offer better than a mortgage in this competitive market? Well, there a quite a few reasons. In this guide, we’ll explore everything you need to know about a cash offer vs mortgage.
What’s the Difference Between a Cash Buyer and Mortgage Buyer?
Whether you decide to pay for a home with an all-cash offer or with a mortgage, there are some important pros and cons to consider.
A mortgage is a type of loan specifically designed for home sales and usually includes a high interest rate. With a mortgage, the money lender can take your property if the payment terms are not met. How big of a mortgage you qualify for will depend on your financial situation.
An all-cash offer, on the other hand, means the buyer wishes to purchase the home outright, with no money lender or other financier involved. This means they have enough liquid assets to afford the home without assistance from a financial institution. For sellers, this is usually a much more attractive option when deciding whom to sell to.
Why is a Cash Offer Better Than a Mortgage for Sellers?
In general, a seller is much more likely to accept an all-cash offer than a financed bid on their home. This is because when selling a home, cash offers represent less risk to the seller.
A cash offer vs mortgage for a seller can give sellers more confidence in the buyer. With a cash offer, there’s no chance financing could fall through. This ensures the deal goes ahead as planned.
Some other reasons sellers probably prefer cash offers include:
The Sale Closes Faster
Selling a home can be a nerve-wracking process. When selling to a mortgaged buyer, the time you’ll spend wondering if the deal will go through is even greater.
Even for those with a mortgage preapproval, it can still take 45 to 60 days to close the transaction. That’s two months of worrying about anything and everything that could go wrong.
Cash offers, on the other hand, usually close within two weeks.
Fewer Inspections or Appraisals
Mortgage lenders often require that a home meets certain standards before they’ll process the transaction. This usually means that buyers will request come appraisals or inspections before closing a home sale. All these inspections can cost you serious time and money.
All-cash buyers are also sometimes willing to pay more than the appraisal price for the home. They also usually have the liquid assets to accommodate this.
Mortgaged buyers are much more likely to place a contingent offer. This means that they’ll only buy the home if it meets certain conditions. For example, appraisals and inspections are examples of contingencies, though they aren’t the only ones.
Buyers may request a loan contingency, which means they can easily drop out of a home sale contract if a loan is not secured. This can be a major waste of time and effort for the seller.
All-cash buyers generally won’t request contingencies. This gives the seller peace of mind that the sale can go through in a timely and simplified manner.
Close the Sale Faster and Easier
The closing process is usually drawn out and difficult for buyers and sellers alike. But with a cash offer, the process is much more simple.
Money lenders often request more paperwork, more home requirements, and more effort from both the buyer and the seller. When you cut out the middle man, the home sale closes much more quickly.
Is a Cash Offer on a House Better for Home Buyers?
Cash offers make up only about 36% of sales bids. For those stuck in bidding wars, cash offers set you apart from other buyers. In a market as competitive as the one we’re currently in, that can be a huge bonus.
Cash buyers also receive the same benefits sellers do, including saving time and money on closing costs and interest. Plus, they give you more negotiating power, as sellers may be more eager to take a sure thing than deal with money lenders.
Additionally, cash buyers can enjoy a mortgage-free life. After all, being in any kind of debt is the easiest way to disrupt your finances.
However, there are a few drawbacks when it comes to all-cash offers for buyers. These include:
Diminish Your Liquid Assets
Buying a home in cash takes quite a few liquid assets. For some buyers, it may take all their liquid assets.
This is not necessarily a downside if you don’t have any big expenses planned in the near future. However, if you’re buying a home, the odds of unexpected expenses popping up are high.
If you decide to go with a cash offer, make sure you have more than enough money on hand. You don’t just want to account for the home sale, but for any maintenance, repairs, or remodeling that might come up, as well.
No Mortgage Tax Deduction
There may be tax deductions for those buying a home with a mortgage. This is to help cover interest rates, which can be high. However, when you buy with cash, this deduction is no longer an option.
This is not a major drawback for most buyers, though. Recent tax policy has made these deductions virtually obsolete except for a very limited number of home buyers, depending on the size of the mortgage and the mortgage’s interest rates.
While this tax deduction may not matter to some homebuyers, you could be missing out on certain savings come tax season. It’s best to talk to a financial planner or tax expert before purchasing a home in cash.
You Should Still Get an Appraisal
Though the streamlined process of avoiding an appraisal may be attractive to sellers, it could put buyers at a certain risk. Even if you’re buying your home in cash, you should opt for an appraisal. This helps you know whether you’re overpaying for the home.
Appraisals usually only take about a week. They can cost around $300 – $400. If you want to remain competitive, you can offer to pay this cost, too.
This may entice the seller to continue with the transaction, despite the extended time the appraisal will take.
How to Make a “Cash” Offer Without the Cash
Even if you don’t have enough liquid assets or feel overwhelmed by an all-cash offer, you can still be an attractive home buyer capable of winning a bidding war.
Decision-now approval is a great way to make your offer as competitive as an all-cash one.
Decision-Now Mortgage Approval
Decision-now mortgage approval is also called underwritten pre-approval or upfront underwriting. It essentially means that your loan is already funded and the remainder of the sales price has been accounted for and verified by the lender.
When you have decision-now approval, you can more easily streamline the closing process. Since this is one of the main benefits of working with an all-cash buyer, this pre-approval can make you just as attractive as a cash buyer.
Not every lender offers decision-now mortgage approvals, however. As always, you should take your time when shopping around for a mortgage to ensure you find the best possible deal.
Can You Be Foreclosed on Without a Mortgage?
The short answer is yes. Failure to pay a mortgage isn’t the only way that foreclosures happen. Your home could also be foreclosed on as a result of a tax lien.
A tax lien means that you have failed to pay your state, federal, or property taxes. As a result, the government may be able to seize your assets to cover the cost. Unfortunately, this includes your home.
Occasionally, those who have a tax lien on their home may have a short redemption period. This is an opportunity to settle their debts before the government seizes the property. Redemption periods can last anywhere from three months to three years.
However, interest may accrue during this redemption period. You may be responsible for these costs as well.
Tax Deed Sale
Your home can also be foreclosed on via a tax deed sale. This is when the property itself is sold at auction. The minimum bid for the auction will be equal to the amount owed in back taxes, plus interest.
The original owner may or may not receive any excess amount bid during the auction. This will depend on your tax jurisdiction.
Become an Attractive Buyer With an All-Cash Offer
So, why is a cash offer better than a mortgage? Well, it’s less risky, more efficient, and all-around simpler for both the buyer and the seller. However, buyers must be certain they have enough liquid assets to cover both the cost of the home and any unexpected repairs that may arise.
If you’re ready to sell your home and enter this competitive market, check out our free Home Valuation tool. With this tool, you can estimate the value of your home in just a few short minutes, create an account and get multiple cash offers.