Can You Buy a House With Cash?
Prospective homeowners wondering if they can buy a house using cash will be happy to hear that the answer is a big yes. The difficulty of raising the capital to buy a home outright has made it seem impossible, but the option of cash or credit still applies when buying a home. In the post-2008 economy, many individuals opted to forego a mortgage and purchase a house entirely with cash for a number of reasons, including stricter lending rules and lower housing prices.
Even the wealthy have traditionally bought their homes on a mortgage to avoid tying up a significant amount of their cash in property, but the new trend has been to buy a house using cash with the hope that there will be a rich return on investment when prices go up further down the line.
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Should You Buy a House with Cash Only?
The Upside to Using Only Cash:
From the jump, an individual who plans to buy a house with cash only is more attractive to sellers. That person can quickly close the deal without waiting for a mortgage application to be approved.
This aspect gives buyers a competitive edge when it comes to beating other bidders, especially if the current owners are eager to sell their house. Moreover, sellers are willing to accept a smaller cash payout for faster access to the funds. This gives you, the buyer, higher bargaining power.
As a new homeowner, deciding to buy a house with cash entirely can provide substantial peace of mind for yourself as well. Mortgage payments typically take a large bite out of household budgets, and keeping up with them can be a source of stress. Paying cash for a house significantly reduces your month-t0-month financial obligations.
In addition, the process of buying a house with cash removes the burden of going through the tiresome approval process needed to obtain a mortgage. The carefree attitude demonstrated by the financial sector leading up to the financial crisis necessitated stricter lending criteria, and current buyers are taking the brunt of that today.
Buying a house with cash only can even increase your income later. If you fall on hard times after paying cash for a house and decide to start renting out a room, you can make money without worrying about charging enough to clear your mortgage payments. Instead, any rent you receive will become an additional source of income as opposed to a way to pay for the house.
The Downside to Saying “No” to a Mortgage:
On the other hand, even if you can pay all cash for a house, there can be downsides. By putting all your money into one asset, you run the risk of losses in the long term that could have been mitigated by diversifying your investments. Expert opinions tend to fluctuate between the benefits of investing in real estate versus investing in the stock market. Historically, property has been considered the safest bet.
An honest assessment of your financial goals is required in order to consider which is most important to you: high-risk, high rewards by obtaining a mortgage or moderate-risk, moderate rewards by buying a house with cash.
Ultimately, the question is not can you pay cash for a house but whether you should. It comes down to your personal financial situation. Just because you have the entire cash amount, doesn’t mean you can afford to tie it all up in property, especially if you only have a little money left over.
Property does not have the same liquidity as a bank account, meaning if you decide to buy a house with cash and then decide you need speedy access to that cash, it will take time to sell your home. Even if you pursue the option of taking out a loan with your house as collateral, the process and paperwork will add to the length of time you will need to wait.
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How to Save Money to Buy a House
Sounds great, right? Living in a beautiful home that you own completely, where groceries and utilities are the largest expenses each month. However, unless you win the lottery or are lucky enough to be the beneficiary of a comfy trust fund, you will need to have a financial plan. It isn’t difficult to figure out how to save money to buy a house, but it is difficult to make the changes necessary to do so. You can save money by:
Creating a Realistic Budget:
Saving money to buy a house requires awareness. Track your expenses and determine how much you spend each month. After subtracting taxes and your fixed costs, like rent, determine how much you put towards groceries, your phone bill, and other necessities and then commit to those numbers. Include in your budget an amount of money that has to be put towards savings each month. In addition, make sure your budget is realistic and provides you a little bit of discretionary spending.
If you make your life miserable by only saving, you will be less likely to stick with your plan. Include in your budget an amount of money that has to be put aside each month, and you’ll be well on your way to saving money to buy a house. You can even create your budget right on your phone by using one of these handy budgeting apps:
Adjusting Your Lifestyle:
Think of ways to adjust your lifestyle to reduce some of your necessary but flexible costs, like food, in order to increase your savings. Buying a house with cash is easier said than done. Making a transition, such as taking public transportation instead of driving, could also save you hundreds of dollars a month. And when you finally purchase you new home in cold, hard cash, you will be able to revert back to some of your old indulgences with the added bonus of knowing your future is secure.
Not Letting Your Money Sit Idly:
If you have some money saved, whether it’s for a down payment or to buy a house with cash, don’t just let it sit there. Sit down with a financial advisor and find out how you can make your money work for you. You are guaranteed to find an investment strategy at a risk level that you are comfortable with, whether it means dipping into some mutual funds or diving right into the stock market.
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What Is the Buying a House with Cash Process Like?
Although it may sound like it’s completely foreign, paying cash for a house is a very similar, in fact simpler, process than buying a house with a mortgage. At the end of the day, there are four steps that are essential no matter how you plan on paying, and they are to:
- Make an offer
- Make provisions in your contract
- Make sure you’re getting your money’s worth
- Make sure to close the deal
Make An Offer:
Whether you’re taking out a mortgage or buying a house with cash, making an offer is the simplest and perhaps most uncertain part about house hunting. You want to lowball it enough that you aren’t offering to pay more than you need to, but you also don’t want to stick so close to the asking price that you risk being outbid by another buyer.
However, unlike the other stressful aspects, like finding a lawyer, understanding the contract, and agreeing on a closing date, making an offer is as simple as stating what you have to give. This process will also be much simpler once you express your willingness to pay cash for the house. As a sure thing, you will be more attractive to sellers. Furthermore, they will be more flexible when it comes to negotiating the price.
Make Provisions in Your Contract:
If you do wind up signing a contract after making your offer, be certain to include provisions that allow you to walk away should the home fail an inspection. Can you pay cash for a house? Yes. Do you want to live in a house with pests or structural problems? No. Ensuring your contract includes stipulations for any issues will give you the freedom to either back out of the deal or renegotiate on the price to compensate for any repairs or additions you may need to make.
Make Sure You’re Getting Your Money’s Worth:
You may be at risk of overlooking an important step if you decide to buy your house with cash, and that is getting your house appraised. If you applied for a mortgage, the lending institution would require an appraisal to ensure that the house you are purchasing is worth more than the amount it is lending to you.
Appraisers have the expertise to give you a number that reflects current market trends and neighboring properties, in addition to the home’s condition. This is an expense that has the potential for astronomical savings. It empowers buyers to negotiate a fair and accurate price for their property, and somebody buying a house with cash will have all the incentive in the world to get a square price.
Make Sure to Close the Deal:
Setting a closing date is much easier when you buy a house with cash only because payment is not contingent upon when a mortgage gets approved. Therefore, you have more flexibility. Unfortunately, paying cash for a house has closing costs and does not relieve a new homeowner from other pesky bureaucratic tasks, like title searching.
Additionally, there are specific aspects of house hunting that you should retain even if you decide on the buying a house with cash process. Finding a trusted realtor is important because there will be parts of the process that are difficult to handle, including inspections, appraisals, and closing. You will also feel a great sense of relief knowing there is someone who represents your interests.
Remember: The seller’s real estate agent will not have your interests in mind.
Agents are also invaluable when it comes to negotiating your contract. Can you pay cash for a house and still negotiate your closing costs? Absolutely. Contrary to popular belief, it is not necessary to use a standard agreement, and contracts can definitely be reworked to fit your needs.
Are There Closing Costs When You Are Paying Cash for a House?
The sad news is paying cash for a house still has closing costs. As the name suggests, it basically entails costs paid at closing and can include any number of payments that have not yet been settled. Many are optional but highly recommended, and so they have been included here. While there may be some unusual closing costs in individual cases, closing costs, regardless of payment type, typically include the following:
- Lawyer’s fees
- Title costs
- Recording fee
- Appraisal fees
- Inspector fees
- Prorated property tax
It is highly recommended to hire an attorney regardless of whether you choose a mortgage or you buy a house with cash. This one is relatively straightforward and goes towards the attorney who has provided counsel throughout the process by tweaking and clarifying contracts, and this is normally paid at closing.
A title search is undertaken to collect the necessary documents required to have a legitimate transfer of property. One of the key components of the process is ensuring that the seller has a saleable interest in the property, meaning he/she owns and has a right to sell it to begin with. This also confirms whether there are any liens against the property or restrictions on its use. Even if you avoid interest rates and mortgage payments by buying a house with cash, liens and restrictions can be a substitute problem in the future.
Title insurance is the safety net if the title search fails to catch any issues before the sale is completed. If any problems do arise – such as the property not actually belonging to the previous owner or the existence of liens – title insurance serves to compensate for any monetary losses up to the amount it insures. This is particularly important if you used the buying a house with cash process, since a huge chunk of your money is tied up in this asset.
This is an unavoidable closing cost, even if paying cash for a house. The fee is charged by the government to have the real estate transaction recorded and made part of the public record.
This is paid to the professional appraiser who verifies the house is worth what you are paying for as opposed to less. If you are paying cash for a house, this closing cost is exceptionally important since you are investing so much. Appraisers are experts with the ability to take a number of different factors, like neighboring properties and market trends, under consideration.
This is another highly recommended expense that those buying a house with cash may be tempted to cut corners on. Checking that you are not inheriting a pest problem or any structural issues will put you at ease and ensure you will not face serious issues down the road.
Prorated Property Tax:
Since almost all real estate sales take place on a date other than the date the new tax year begins, there will be a proportion of the year’s tax that will be the responsibility of one party and not the other. A prorated property tax ensures that this is divvied up fairly. This is an often forgotten expense to consider when you are figuring out how to save money to buy a house.
You Save on Closing Costs When Paying Cash for a House
While it may seem like there is not a difference in closing costs, buying a house with cash is a process that lets you avoid additional closing expenses associated with obtaining a mortgage such as:
- Mortgage application fees (this can be paid prior to or at closing)
- Prepaid interest or points (a way of acquiring a lower interest rate)
- Mortgage insurance
- Property insurance (almost always mandated by the lender)
It is definitely possible to buy a house with cash. Mortgages have become inextricably linked to home ownership in the public consciousness, but they are not mandatory. With lifestyle changes, financial planning, and budgeting, it is achievable to save money to buy a house without credit.
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