Most people take out a mortgage to buy a house. But while using a home loan is the norm, it’s not always necessary. Let’s take a closer look at how you can buy a house without taking on mortgage debt.
- You can buy a house without a mortgage.
- Some options for doing so include rent-to-own programs, owner financing, private loans, and cash.
- If you do buy a house in all cash, make sure you find the right property, figure out where the cash will come from, and gather proof of it.
Can You Buy a House Without a Mortgage?
While it is possible to buy a house without a mortgage, doing so is not an option for everyone. In fact, a study by the National Association of Realtors (NAR) found that 87% of recent buyers financed their home purchases. It all depends on your unique situation. Even if you’re able to buy a house mortgage-free, it’s important to determine whether or not you should. If interest rates are very low or you have high-interest debt to pay off, for example, you may be better off with a mortgage.
Options for Buying a House Without a Mortgage
There are a number of ways you can buy a house without a mortgage. Here are a few to consider.
Rent To Own
With a rent-to-own program, you live in the home and can choose to buy it at some point in the future. Until you make the decision to buy the home, however, the owner will act as the landlord and officially own it. It will be their responsibility to make mortgage payments.
“During the lease, the owner will set aside a portion of your rent that can be used later if you decide to buy the home. “This option may give you more time to rebuild your credit score and save money,” explained Ryan Fitzgerald, real estate agent and owner of UpHomes in an email to The Balance.
Owner financing is when a homeowner finances the loan to the buyer, rather than a bank or a traditional lender. Just like with a mortgage, however, the homeowner will create an agreement with the buyer, which includes a down payment amount and interest rate.
Arnell Brady II, senior loan officer of Bay Equity, told The Balance via email that owner financing may make sense if you don’t qualify for a traditional mortgage. In addition to a house, you can reap the benefits of lower closing costs.
Owner financing may be an interesting option, but you won’t have an official claim to your new home upfront. “The seller will usually wait to transfer the property title until you have made your last payment,” said Fitzgerald.”
If your credit score is too low for a traditional mortgage, you may get approved for a private loan. Just keep in mind that if you go this route, you’ll likely have to settle for a higher interest rate. This is because it’s riskier for lenders to lend that much money to you.
The benefit of a private loan, explains JoAnn M. Echtler, real estate agent at Berkshire Hathaway HomeServices in an email to The Balance, is that most private lenders perform their own appraisals and inspection, which can expedite the process.
“If you have a friend or family member who will let you borrow money, that's an even better option. A private loan like that will normally give you more flexibility with the payment terms and interest rate,” said Fitzgerald.
Pay With Cash
When you buy a home with cash, you have enough cash to cover its entire purchase price. “Paying for your home in cash is an excellent idea if you have the funds to make it happen as a cash purchase will normally save you money in the long run on closing costs and interest payments,” explained Fitzgerald.
Making a cash offer on a house will also give you a leg-up in winning the home if there are multiple offers. A cash offer is ideal for the seller because they don't have to worry about a buyer backing out due to financing issues.
How To Buy a House With Cash
If you'd like to buy a house with cash, here are some tips to help you out.
Find the Right House
First and foremost, take the time to find the ideal house for your unique lifestyle and cash budget. Make sure you can comfortably afford it. Brady recommends that you carefully consider its condition and whether you’ll need to invest more money for any major repairs in the near future.
Determine Where You’ll Get the Cash
There are a number of places where you can get the cash for a house. Brady explains that it’s becoming more and more common to tap into your 401(k), savings, or explore crowdfunding options. Make sure you know exactly where your cash will come from.
Gather Proof of the Cash
If you want to stand out as a cash buyer, it’s a good idea to show the seller that you do have the funds. Therefore, you may want to ask your bank or other financial institution for documents that show you have enough cash on hand to cover the entire house purchase upfront.
Frequently Asked Questions (FAQs)
What happens if you buy a house without a mortgage?
If you buy a house without a mortgage, you won’t have to repay a mortgage company the principal and interest. But you may still owe interest to another party unless you pay for your home in all cash.
Do you still pay for homeowners insurance without a mortgage?
Even though there’s no legal obligation to carry homeowner’s insurance on a house, most mortgage lenders will require it. When you buy a house without a mortgage, you might not have this requirement. However, it’s still a good idea to buy homeowner’s insurance to protect your investment.
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