Buying a House With Cash: What to Know Before Skipping the Mortgage

What is a cash buyer?

A cash buyer is someone who pays for a home or property with all cash, as opposed to taking on a mortgage to spread the payments out over a defined period of time. Paying cash for a home may appeal to someone with limited credit history or someone who wants to make the most competitive offer possible.

But being a cash buyer doesn’t mean paying for a home with physical dollar bills, either. It’s using funds to finalize the purchase, such as from savings or checking accounts, investments or proceeds from the sale of another property.

How to buy a house with cash

The process of buying a house with cash is similar to buying one with a mortgage, but without the substantial paperwork involved when working with a lender.

1. Set your budget: Decide how much you can afford, including the purchase price, closing costs, property taxes and any repairs or renovations.
2. Obtain a proof of funds letter: Ask your bank or financial institution for a letter confirming you have enough liquid assets to cover the full purchase price. Sellers and agents usually require this before accepting your offer.
3. Find your property: Search for homes that fit your needs. Working with a real estate agent experienced in cash deals can help.
4. Submit a cash offer: Make an offer on the home, clearly stating you’re paying with cash. Cash offers are often more attractive to sellers because they avoid financing delays.
5. Provide earnest money: Deposit earnest money into escrow to show your commitment. The amount is negotiable and part of your contract.
6. Review contingencies and conduct due diligence: Even as a cash buyer, consider including inspection and title contingencies to protect your investment.
7. Close on the home: Work with a title company or real estate attorney to finalize paperwork, transfer funds and record the deed in your name.
8. Arrange for homeowners insurance: Secure insurance coverage before closing to protect your new property from day one.

Even when you buy a house with cash, you’re still responsible for closing costs and inspection fees.

While a cash buyer avoids the application, paperwork and usual appraisal required by a lender, there are other financial requirements involved. You need to show proof that you actually have the funds to complete the transaction, such as a recent bank statement.

And keep in mind even though you’re paying cash, there are still some fees, including closing costs and inspection fees, that you’re still responsible for.

“Don’t forget the homeowners insurance — without the lien of a mortgage, no one requires you to have it on closing day and the policy is kept current,” advised Rachel Lewis, a realtor-broker and CEO for Lewis & Kirk Realty based in Davidson, North Carolina. “You could end up in a bad situation without home insurance, so be sure it’s paid for out of closing proceeds and active on day one.”

Negotiation strategies for cash buyers

When buying a house with cash, you can use several negotiation strategies to get better terms:

• Emphasize the speed and reliability of your cash offer. Sellers like buyers who can close quickly and don’t have financing risks.
• Use your ability to pay in full to negotiate a lower sale price, especially if the home has been listed for a while or the seller is motivated.
• After the inspection, request repairs or credits. Since you’re not restricted by lender rules, sellers may agree to avoid delays.
• Offer flexible or fast closing dates to help meet the seller’s needs. You can even propose a rent-back deal if the seller needs time to move.
• Limit contingencies — like waiving the financing contingency — to make your offer stand out even more.

By using these strategies, cash buyers can often get a better price or more favorable terms.

Pros of buying a house with cash

For some buyers, paying cash for a home is a dream come true. There are multiple advantages worth considering.

No mortgage payments

The first and perhaps most obvious benefit is you won’t have a monthly mortgage obligation. Not only is this one less financial burden each month, but you also won’t have any interest and fees associated with a mortgage, which are often significant.

For example, a homeowner with a $300,000, 30-year conventional mortgage with a fixed 6.5% interest rate ends up paying about $382,000 just in interest over the life of the loan.

The house is yours

Paying cash means you own your property outright. Even if you lose your job or come under financial hardship, you may have peace of mind knowing you have a roof over your head.

Potentially more attractive to sellers

Paying cash for a home is typically a much easier transaction for both the buyer and seller. There’s less chance something could go wrong with the closing, a job loss or the mortgage underwriting process — which can make you more attractive to a seller.

“Cash buyers may have more negotiating power, as their offers can be more attractive due to the lack of financing contingencies,” said Lewis. “This means less risk for the sellers as appraisal and other terms of the financing can cause delays and hiccups. They can often close deals more quickly and have a competitive edge in fast-paced markets.”

Lower closing costs

There are numerous fees associated with closing, such as lender and application fees, loan origination fees and purchasing points. Without the use of a lender, the buyer avoids these types of fees and ends up with lower closing costs.

» MORE: How much are closing costs?

Cons of buying a house with cash

Even though you might have the ability to pay cash for a home, there are a few drawbacks worth noting.

Your money is in one asset

Unless you have other investments and savings, using cash to buy a home limits your portfolio diversification. It puts all your “eggs in one basket.” It’s possible your money could earn a greater return by spreading out the investment versus putting it all in one real estate transaction.

Miss out on mortgage tax deductions

You won’t have the option to deduct any of your mortgage interest on your personal income tax return. Borrowers can deduct mortgage interest on the first $750,000 ($375,000 if married filing separately), but you don’t have access to this deduction when you pay cash.

Limited liquidity

You limit your liquidity — how quickly you can convert your investment into cash — when most of your money is in your home. Bank accounts give you almost instant access to your funds, and brokerage accounts might take a day or two but are generally a quick process to convert. However, a home can take months to sell, leaving you with a longer time frame to access your own money.

You can use a home equity loan, line of credit or reverse mortgage (if you’re of age), but each of these comes with its own pros and cons, including fees.

» MORE: Tax deductions for homeowners

Should you buy a house with cash?

Purchasing a home is a major financial commitment, whether in cash or with a mortgage. But before you dedicate your cash to a single purchase, you should assess your personal financial situation.

“While cash offers provide advantages, buyers should approach real estate transactions with diligence, keeping in mind both the benefits and responsibilities that come with cash purchases,” advised Lewis.

Consider if you need the cash for other important obligations, such as an emergency fund, unexpected medical bills or expenses, and if a cash purchase leaves you depleted. You may not have the liquidity you need for life’s financial challenges if your home purchase uses all of your cash.

Another consideration is determining whether putting the cash into other investments yields a greater return. While no investment can guarantee returns, there may be other tax advantages and diversification options offering better returns in the long run versus a real estate transaction.

On the other hand, many homeowners find great relief in knowing their home is entirely theirs until they decide to sell or pass it on.

Bottom line

Buying a home in cash not only saves you money on a monthly payment, but also saves thousands upon thousands of dollars in interest over the life of the loan. It may also give you the winning edge in a bidding war or securing an offer on your dream home.

But before you pour your money into a single purchase, think about if you are better off investing the money in other avenues that have the potential for greater returns, or if you are putting liquidity at risk and losing any potential tax benefits.