Buying a Home in Cash? Here’s How the Process is Different than Using a Mortgage

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The real estate market has been chaotic over the past year.  With homes selling at record speeds and record prices, homebuyers who were able to pay for their home in cash had a clear advantage over financed buyers.  A cash offer on a home simply means that you have all of the money to buy the home in cash.

Buying a home using cash is the simplest real estate transaction because there are no third party lenders to consider during the purchase.  So how do you purchase a home with cash?  The process isn’t as easy as walking into a home with a suitcase filled with cash and signing a few papers.  But it is easier and less time consuming than financing your home purchase.  Here is how the process of buying a home in cash is different than using a mortgage.

Step 1: Make an Offer

You’ll need proof of funds if you want to make an all cash offer.  In general you want all of your cash to be in one account so that the financial institution can issue you a letter stating that the funds are available.  This is the letter that you will submit to the seller.

Step 2: Deposit your Earnest Money

If your offer was accepted you’ll need to make an earnest money deposit.  Sometimes called a “good faith deposit” an earnest money deposit is the money that accompanies your offer and tells the sellers that you are serious about your bid.

The EMD is like a guarantee for the seller and is often found in all cash offer contracts.  If you back out of the real estate deal you could lose your earnest money deposit.  Of course the amount of your EMD is negotiable with some sellers requiring just $500.   The typical earnest money deposit is 1% to 3% of the total purchase price.  However, in a higher-end or very competitive market deposits can go as high as 10%.

There is never a circumstance where you should hand an earned money deposit check directly to the seller.  The money should be transferred to a trust account with a third-party firm that provides real estate escrow services.  When the real estate transaction is finished the fund will generally be credited back to you at closing and will be used to offset your down payment and other closing costs.  All of the specifics of your earned money deposit should be written out in a purchase contract that can be verified by either a real estate attorney or real estate agent.

Step 3: Due Diligence

Purchasing a home is a big financial event that you do not want to go into without having done your due diligence.  As an all cash buyer you do not have a lender requiring these extra securities to purchase the house so it may be tempting to skip these.  That would be a huge mistake.  You need to know everything about the house you are preparing to purchase so that you do not get trapped in a money pit.

Do a title search of the property to verify that there are liens on the house.  You also want to do a home inspection and appraisal.  The inspection will ensure that the home is in good shape and all of the systems are working properly.  The appraisal will confirm the property’s value and ensure that you are not overpaying on the home.

Use a licensed third party inspector and appraiser since these are the people that are going to notify you of any major issues with the home.  Finally you’ll need to have a land survey done.  This is to establish your property lines and is optional depending upon where you are buying your property.

Step 4: Secure Homeowner’s Insurance

When you pay cash for a house you technically do not need to get homeowner’s insurance since you aren’t working with a lender.  However, you shouldn’t skip it.  Homeowner’s insurance protects you from damage that may occur to your home due to a weather event, fire, or other disaster.  Generally homeowner’s pay around $1,445 annually for the insurance premiums which is approximately $120 per month.  Conversely, homeowner’s insurance is required by a lender if you want to be financed to buy a home.

Step 5: Wire the money and Close

Everything has checked out and you’ve secured your insurance!  You are ready to close!  A day before closing the buyer will wire the cash to the seller.  That’s it!  The purchase is done.

The Difference Between a Financed Home Purchase and an All-Cash Purchase

The true difference between purchasing a home with cash and purchasing a home with the assistance of a mortgage is time and requirements. In order to purchase a home with financing you have to go through several steps with a lender to be prequalified, preapproved, and finally fully approved for a mortgage.

In addition, purchasing a home with a mortgage requires you use contingencies which may work against you as you negotiate with a seller.  Closing with an all cash offer is much faster than closing with a financed offer.  When an offer is financed, the lender needs to do its due diligence to ensure that the person who is being lent the money has the funds, credit, and job security to continue making the mortgage payments for the term of the loan.

Financing requirements can take weeks or longer to complete depending upon the borrower’s financial situation.  Once you remove financing requirements from the purchasing process, a cash home purchase can close in around one to two weeks.  Closing on escrow can be done in as little as seven days, presuming all of the paperwork is put in from the title and escrow companies.

Should You Buy a Home with Cash?

Buying a home with cash isn’t for everyone.  You need to have the cash in hand or have a way to get the cash through special programs such as HomeLight Cash Offer.  If you have the option to pay in cash it will certainly help you in the home buying process during the current “cash is king” market.  Cash is always the most competitive offer because of its quickness and ease.  It allows you to avoid common mortgage contingencies.

Read Also: 6 Tips and Tricks for Buying a Home in Your Twenties

Contingencies are contractual stipulations that have to be cleared before you will be able to get a home loan.  The two most common mortgage contingencies are financing contingency and appraisal contingency. To a seller, a contingency is a big deal because they are responsible for 37% of closing delays and 21% of contracts that fall through.

Not only does paying in cash speed up the process of purchasing a home and deter the possibility of a deal falling through, it also could save you money on the home price.  Sometimes when a seller just needs to get rid of their home and they want a quick closing they are willing to go for an all cash offer that is slightly lower rather than wait on a financed offer that is a bit higher offer.  This isn’t always the case especially in a seller’s market like the one we are in now, however it is not unheard of.  You will also save money by avoiding the interest that comes with a mortgage.

All-cash home purchases are on the rise due to an excessively competitive housing market.  However, a cash home purchase doesn’t work for everyone.  Buyers who are purchasing in cash could risk tying up their entire savings in the purchase of their home.  This puts them in a dangerous position of having no savings to fall back on in case of an emergency or unforeseen circumstance.

Think about your buying options and consider which will be the safest and most effective when purchasing a home.  You should consult a real estate agent for guidance and work with him or her throughout your home buying process.

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