How to make a cash offer on a house — with or without cash
Erik J. Martin The Mortgage Reports Contributor
July 21, 2021 – 9 min read
Cash is king for many sellers today
If you’re hunting for a house today, chances are you’ll be competing with other buyers for the same property.
Making a cash offer is often a great way to improve your odds in a bidding war. And today, there are even companies that will back a cash offer for buyers without enough savings to go it on their own.
But is making a cash offer — with or without your own funds — really a good idea? And how does it work in practice? Here’s what buyers should know.
How a cash offer works
A cash offer on a home is pretty straightforward: You find a property you want and then submit an offer to purchase it outright, without a mortgage loan. The funds typically come from savings, selling an existing home, or gift money.
Note that ‘cash offers’ typically aren’t paid with cold hard cash. Money almost always changes hands via cashier’s check or wire transfer.
“A traditional cash offer is specified in the contract to purchase a home without a loan involved,” says Elizabeth Boese, a Realtor with Coldwell Banker Realty.
“The buyer will still put down earnest money once they are under contract as a deposit toward the amount they owe for the home. The rest of the money will typically be wire transferred to a title company just before closing day,” she explains.
Before you make an earnest money deposit, you will have to show ‘proof of funds’ — evidence you have enough liquid cash available to purchase the property.
You’ll typically need to show bank statements and a letter of endorsement from your bank or financial institution.
How to make a cash offer on a house
There are several steps involved with making a cash purchase:
- Find a home for sale you like and make an all-cash offer. Experts strongly recommend crafting an offer with the help of a real estate agent and/or real estate attorney
- Agree on a purchase price with the seller (this may be different from the asking price)
- Show proof of funds by providing a written endorsement from your bank as well as bank statements
- Pay for a professional home inspection and appraisal, which are strongly recommended by experts to protect yourself from purchasing a defective property or paying more than the home is worth. In a competitive home buying market, some opt to waive the appraisal contingency or inspection contingency
- Assuming there are no issues post-inspection or appraisal, both parties will sign the offer/contract of sale
- Have an escrow account opened by a title company or attorney, and put your agreed-upon earnest money deposit into the escrow account
- Obtain a title report, “which will ensure that a clean title is delivered at closing,” says Michael J. Romer, managing partner of Romer Debbas LLP. “Once the title is cleared, the parties will proceed to closing”
- Put the remainder of your cash into the escrow account. These funds will be given to the seller at closing, and ownership (in the form of a deed) will be transferred to you
Provided you have the liquid cash available to purchase a home outright, these sales can close quickly — often in a matter of days.
How to make a cash offer — without paying cash
Cash offers are often more competitive in a seller’s market. They can give buyers a real edge in today’s cutthroat real estate scene.
But not everyone has enough cash to make such an offer. This could be especially difficult for first-time home buyers, who aren’t able to use proceeds from selling a current home.
But there may be a way to make a cash offer without actually paying cash.
Cash offer financing options
Some buyers enlist a company to pay cash on their behalf, and then pay the company back using a mortgage loan.
Here’s how this typically works:
- The company puts up the cash for your offer from its own funds
- These companies typically promise a quick closing (in as little as 72 hours with some)
- This will likely impress the seller to accept your cash offer, which can help you sidestep a bidding war with other buyers
- After the transaction completes, the home is held by the company while you finalize mortgage financing with a lender of your choice
- The company sells the home to you, and you pay for it with your approved mortgage loan
This is a relatively new option offered by companies like Ribbon, Homeward, or Accept.inc.
If you need to sell your existing home first, “these companies can also contract to purchase your current home, allowing you to present that you will have cash available when it’s time for you to close as a buyer,” says Bruce Ailion, a real estate attorney and Realtor.
Should you use cash offer financing?
This isn’t a true ‘cash offer,’ since you still end up with a mortgage loan and have to pay interest on your home purchase. But it may be a way to get around some of the challenges of buying in today’s hot market.
“These companies are similar to hard money lenders in that they make the money you need available, but at a high cost,” cautions Ailion.
According to Romer, the fees companies like these charge for backing your cash offer often range from 1 to 3 percent of the cash fronted.
“The best candidate for working with a cash-backing company is a purchaser who needs financing to complete the transaction but is competing against other offers that may be all-cash. Companies like Ribbon can convert your contingent offer into an all-cash/quick-close offer to push yours over the finish line,” adds Romer.
Khari Washington, a real estate and mortgage broker with 1st United Realty & Mortgage, Inc., cautions that this strategy isn’t necessarily a slam dunk.
“Some sellers do not consider these true cash offers — they see them more as hard money offers that are questionable. So your offer may not be accepted,” he says.
Benefits of buying a house with cash
Cash deals typically close faster and involve less hassle for both parties.
“The seller does not have to worry about you being denied financing by a bank. That can give you an advantage in purchasing a home and having your offer accepted,” says Ralph DiBugnara, president of Home Qualified.
What’s more, paying in cash can give you the flexibility to remove a financing contingency from your offer.
That means the home sale does not hinge on your ability to get approved for a mortgage — so it’s a surer bet for the seller.
“Sellers dislike contingencies because they don’t want buyers to cancel. Especially in this market, where a seller may get multiple offers, it can be difficult for the seller to have to put the house back on the market again if their chosen buyer is denied a mortgage loan,” Boese adds.
As the buyer, making a cash offer means you don’t have to go through mortgage pre-approval, underwriting, and other time-consuming steps of the home buying process.
Plus, if you buy a new home outright, factors like your credit score and credit history don’t matter.
Cash buyers often save money on closing costs, too. When you pay with cash:
- You don’t have to pay fees to a mortgage lender
- You aren’t required to pay for an appraisal
- There is no interest to pay on a mortgage loan
- Fees paid to a title company and/or attorney may be lower because there are no loan documents to deal with
Cash buyers can also shorten their time to close. Many lenders typically need 30 days to close. But cash buyers can sometimes close in a matter of days.
“An all-cash transaction can close as soon as the title is confirmed. This can occur in as quickly as seven to 10 days,” Ailion notes.
Drawbacks of making an all-cash offer
Of course, there are some downsides to making an all-cash offer. The biggest challenge involved is coming up with the money, which may drain your savings and financial resources.
“The main disadvantage to the buyer is that it reduces their liquidity. They may be tying all or nearly all of their available funds into this purchase, which can leave them financially vulnerable if they need cash quickly,” says Ailion.
Keep in mind that your homeownership costs don’t stop when you close on the sale. You’ll have plenty of ongoing expenses, like:
- Property taxes
- Homeowners insurance
- HOA fees (if applicable)
And you want to be sure you have cash leftover in an emergency fund. Draining your savings on a home purchase could put you at risk if unexpected medical bills come up, for example.
Paying in cash also means you won’t be able to take advantage of the mortgage interest deduction on your federal income taxes (which is allowed only if you itemize your deductions).
A final drawback is that you’ll be tying up all or most of your money in real estate. While that’s not necessarily a bad thing, it could limit your opportunity to invest in higher-return assets.
At the moment, most mortgage borrowers pay an interest rate below 4%. Stocks, bonds, mutual funds, and other assets often have a rate of return well above that level.
Many homeowners choose to finance their home purchase and put their savings into such investments instead, because they can see a greater net return.
Of course, the right move depends entirely on your personal finances and long-term goals. If you’re not sure what’s best for you, speak to a trusted financial advisor.
Cash offer FAQ
Is a cash offer on a house better?
In general, an all-cash offer is almost always more competitive than making an offer with financing involved. Attorney Bruce Ailion says “a seller views a cash offer favorably because there is no risk that the buyer will be unable to close the transaction. A cash sale, therefore, is usually worth more to a seller than a higher-finance offer. It represents a higher level of security.” However, making an all-cash offer can reduce your liquidity, possibly leaving you financially vulnerable if, after the sale, you need cash quickly for an unexpected reason.
Can a cash offer fall through?
Yes, all-cash offers can fall through. This can happen, for example, if you have a professional home inspection done and defects are found, or if there are problems with the property’s title that need to be resolved. A seller may also reject a cash offer if they don’t trust the source of the funds.
Are there closing costs on a cash offer?
All-cash buyers pay closing costs just like buyers with mortgage financing. “Common closing costs in a cash offer include title insurance and searches, legal and/or escrow fees, and purchaser side transfer taxes if applicable. But purchasing in cash is generally less expensive than purchasing with financing because there are no mortgage-related fees due at closing,” says attorney Michael Romer.
Can you pay for a house with actual cash?
Buying a home with physical cash is legally allowed if the seller will accept it. However, it is not the norm. “Except for IRS reporting requirements, no specific laws prohibit a cash real estate transaction, although it is highly unusual and not recommended. Cash is indeed king, but sellers will almost always want it to come from a bank and not a suitcase,” attorney Michael Romer explains.
How quickly can a cash buyer complete the sale?
An all-cash transaction can close as soon as the title and title insurance are confirmed. This can happen in as little as seven to 10 days, according to Bruce Ailion, a real estate attorney.
Do you need a home appraisal when you pay cash?
An appraisal is not required when purchasing a home with cash. But experts often recommend paying for an appraisal, which can provide peace of mind that you did not overpay for the property. If you forego an appraisal, “work with an experienced real estate agent and ask the agent for an analysis of recent sales to avoid overpayment,” suggests attorney Michael Romer.
Can I pay cash for a house and then get a mortgage?
You can purchase in cash and then obtain a mortgage loan after closing if you desire. This arrangement is common if you work with a cash-fronting company like Ribbon, Accept.inc., or Homeward. Note that most lenders require that a mortgage loan be obtained within 90 days of closing. You will also pay closing costs again if/when you finance or refinance the home.