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While most homebuyers take out a mortgage to finance their home purchase, that isn't the only way to get into a new house. In March 2022, all-cash sales accounted for more than a quarter of all transactions—the highest it's been since 2014—according to the National Association of Realtors.
A cash offer means a buyer already has the money to pay for a home, and can complete the sale without needing to finance the purchase through a mortgage lender. Paying in cash certainly has its perks, though the biggest barrier is coming up with the funds: The median sale price for a home in the U.S. was $428,700 in the first quarter of 2022, according to U.S. Department of Housing and Urban Development. How does a cash offer work? Let's unpack the details.
What Is a Cash Offer on a House?
A cash offer is exactly what it sounds like: Instead of financing the purchase with a home loan, the buyer has the money on hand to buy the house outright. Making a cash offer means that you aren't beholden to a mortgage lender. If the offer is accepted, it's wise to carry out a home inspection like you would with any other home purchase, but the appraisal is optional. (It's usually required by lenders; more on this in a minute.) You'll then pay closing costs and finalize the transaction using your available funds. Done and done.
It's a different story with traditional mortgage financing. Lenders spell out how much house you can afford in a preapproval letter, which you show to sellers when you're ready to make an offer. If the offer is accepted, you'll likely put up earnest money while the home goes under contract. The home is then inspected and appraised.
When taking out a home loan, you'll have to meet the mortgage lender's eligibility criteria and underwriting standards. This can be a rigorous process that often requires a deep dive into your financial health. If all goes well, the deal moves forward and you'll close on the property.
What Are the Perks of Making a Cash Offer?
On top of not having a monthly mortgage payment, here are some other perks of making a cash offer on a house.
It Can Give You a Leg Up Over Other Buyers
Competition can be thick in a hot housing market, and paying in cash can make you a more attractive buyer. It tells sellers you're ready to close the deal fast. Buyers who are taking out a mortgage, on the other hand, have to jump through many more hoops to finalize the transaction. Buyers who finance are also at risk of encountering a hiccup during the mortgage approval process and being unable to complete the transaction.
Cash offers allow buyers to make stronger offers. If you're taking out a mortgage and bid over the asking price, an appraisal may reveal that the home value is actually less than your offer. The lender could deny your application or request that you pay the difference. Meanwhile, a cash buyer can make a competitive bid without having to sweat the appraisal.
Cash Sales Usually Close Quickly
Processing a mortgage from start to finish can take up to two months. Paying in cash allows for a much quicker home sale because the buyer isn't waiting around for the mortgage lender to approve their application. If all their funds are in order, they can close in a matter of days. This can be an attractive prospect for both the buyer and seller.
Fees Are Typically Lower
When financing a home purchase, closing costs generally add 2% to 5% to the total bill. That's because they usually include various fees related to making and servicing the new mortgage loan. Lender fees never come into play when paying in cash. Cash buyers will still be responsible for some closing costs—like real estate transfer taxes and title insurance fees—but total fees generally don't exceed 3% of the purchase price, according to the National Association of Realtors.
How to Make a Cash Offer
1. Set a Savings Goal
Before starting this process, it might be wise to connect with an experienced real estate agent who understands your local market. They can clue you into average home prices for the type of property you're looking for. This information is useful because it can shape your budget and help you set a savings target.
2. Organize Your Funds
Once you have a rough estimate of how much money you'll need, it's time to get your funding in order. Cash sales require, well, cash—and usually a huge pile of it. How do you plan on covering the purchase? You might consider the following:
- Leveraging cash windfalls from work bonuses, raises or an inheritance.
- Drawing on personal savings—just be sure not to deplete your emergency fund. Experts suggest keeping at least three to six months' worth of expenses on hand.
- Tapping the cash value of a whole life insurance policy, though this will reduce your death benefit if you fail to replenish it.
- Borrowing money from family and setting up a private repayment plan.
3. Look at Properties and Make an Offer
Cash buyers don't have to get preapproved for a mortgage, so they can begin looking at listings whenever they feel ready. You may choose to work with a real estate agent to help you find properties. (Agent fees are typically covered by the seller and factored into the sale price of the home.) Alternatively, you can house hunt on your own and negotiate an offer yourself. Be prepared to pay for a home inspection, which will probably set you back around $300 to $500, according to the U.S. Department of Housing and Urban Development. If you're able to navigate the sale with ease, you can likely button up the home sale relatively quickly.
The Bottom Line
Buying a home with cash has many advantages. It can help you edge out other buyers in a crowded housing market, and closing costs are generally lower. Cash deals also tend to go through faster when compared to traditional mortgage financing. Another benefit is that your credit is never an issue.
Most buyers do end up seeking a home loan, however, in which case credit is extremely important. A lower score could prevent you from getting approved for a mortgage. Experian provides free access to your credit score and credit report whenever you need it. Consider it your first step in the process of buying your dream home.