What Are the Benefits of Paying Cash for a Home?
Sellers prefer cash offers—and they're good for buyers, too
Depending on the temperature of a marketplace, paying cash for a home has benefits from a seller's point of view, and this strengthens the negotiating position of buyers who can afford to pay with cash.
While it's true that all transactions lead to cash in the end, the realities of financing place obstacles between buyers and that the end. Sellers naturally want to deal with buyers who face the fewest obstacles.
Why Sellers Like All-Cash Offers
Some sellers choose all-cash purchase offers over higher-priced offers with conventional or FHA loan financing because they know a cash offer with proof of funds faces fewer stumbling blocks and is more likely to close.
Lenders require homes to be appraised before closing if the real estate transaction is over $400,000; an appraised value less than the amount of a mortgage can spell contract cancellation if a seller doesn't come down on price, or a buyer doesn't increase the down payment. The most common method for appraisals involves looking at comparable sales. This involves choosing three to six properties and comparing those values to the property in question and adjusting upward or downward for updates or missing features. Cash takes the lender—and the need for an appraisal out of the equation.
Even buyers fully qualified for a home loan can be tripped up by any of multiple contingencies. Buyers' qualifications can change upon further scrutiny. Perhaps a buyer wasn't fully employed in the same occupation for the past two years, or financial situations changed prior to closing because the buyer bought a new car or was a victim of identity theft. If buyers have cash, no such potential problems can derail a sale.
Cash sales also take less time. Buyers do not need 30 or 45 days to close if they are not obtaining a loan. Once a home inspection and other contingencies have been satisfied or released, closing can take place in as little as seven days, provided that the buyer is willing to sign a lead paint waiver. A faster closing puts money into a seller's pocket sooner. There are also fewer things that can go wrong in a short escrow period.
Incentives for Buyers to Pay Cash
Because of the reasons for sellers to prefer cash deals, it makes sense for buyers to want to pay with cash—especially in sellers' markets. Buyers willing to pay with cash have an inherent advantage over those who need to borrow.
Lenders with multiple foreclosures in their portfolios sometimes discount the list prices in the hopes that properties will attract multiple offers. Again, buyers who pay cash for these real-estate-owned (REO) homes tend to win multiple offer situations.
There are benefits for buyers other than just negotiating strength. Paying for a home with cash means they have no mortgage payment to make each month, and the equity in the home provides a sense of security if financial emergencies arise. While market fluctuations can change the value of a home, owners without a mortgage still have 100% equity in whatever that market value is.
Federal Deposit Insurance Corporation. "New Appraisal Threshold for Residential Real Estate Loans, " Accessed Nov. 21, 2019.
New York State Department of Taxation and Finance. "How to Estimate the Market Value of Your Home," Accessed Nov. 21, 2019.
Redfin. "How Long Does It Take to Buy a House," Accessed Nov. 21, 2019.
United States Environmental Protection Agency (EPA). "Real Estate Disclosures About Potential Lead Hazards - Homebuyers," Accessed Nov. 21, 2019.
U.S. Department of Housing and Urban Development (HUD), "About Buying HUD Homes," Accessed Nov. 21, 2019.