Buying a home in a competitive market? The best way to get the one you want is to put a good deal of money down on the house, and make an all-cash offer. A cash offer can avoid bidding wars and win the day.
Of course, not everyone has the cash on hand to pay for a house. Some buyers might wait until they have a full loan approval to make their offers. Others might get a boost from friends or relatives willing to advance the cash.
Today, there’s an additional option available that doesn’t require a buyer to fork over the cash. If you qualify for a home loan, chances are you can also get a loan to let you make your seller a “cash offer” as well. That is, you can finance your cash offer.
Here, we take a closer look at the various routes. Depending on the situation, one could lead to a winning deal for you.
Traditional Cash Offers: A Quick Review
Most buyers approach lenders for the bulk of the money needed in a home purchase. Because most buyers depend on a final loan approval to get to closing, standard purchase agreements are contingent on the final mortgage approval. If the buyer’s mortgage falls through, so does the home purchase. When that happens, the buyer gets the deposit back, and the seller puts the home back on the market. How disappointing for all involved! Sellers — and buyers — prefer to know they’ll successfully close the deal.
Deals that don’t need financing, then, are especially appealing to sellers. A cash buyer can sign an agreement with the financing contingency language waived. And the deal can proceed quickly, without stressful waits for credit vetting and re-vetting and the other major hurdles of loan underwriting.
When there are more buyers than homes for sale, buyers try to come in with a competitive edge. And that means they’re more likely to arrive armed with proof of adequate closing funds in a cash account. Cash means money in the bank that’s available to be transferred by wire into an escrow account.
☛ Important note: Real estate closing scams now amount to almost half of cybercrime losses. When preparing to wire cash to the seller, let your bank or credit union and your real estate pro guide you. Watch out for any messages that change the wire transfer instructions.
Next Best Thing to Cash: An Underwritten Preapproval
Cash buyers not only have an advantage in the buying process; they also avoid mortgage lenders’ fees, appraisals for underwriting, and mortgage interest payments. The other side of the coin? All that wealth is tied up in the home at once. This can limit the homeowner’s capacity to make other investments, or even weather a major emergency repair.
Buyers might alternatively consider going ahead and financing the purchase, but time the loan approval so they can waive the contingency if they need to. Consider the underwritten preapproval.
In underwriting, an examiner decides how much it can risk lending through a mortgage. When a buyer’s financial profile is determined to fit the guidelines for that amount, a loan preapproval is issued. As you approach the closing date on a specific home, the lender has to review your up-to-date financial situation and give final approval for the actual sale price.
With underwritten preapproval, these steps are merged so the buyer is promptly told, up front, that they’ll receive final approval on a given loan amount. The buyer has a conditional approval to show the seller. Full approval comes through once the appraisal and inspection and other necessary steps are wrapped up.
In this scenario a seller has assurances that the loan is will cover the deal, giving the buyer an edge in negotiations. Note that the big banks typically don’t do underwritten preapprovals. Speak with a mortgage expert in your area to learn what’s available and where, and how the terms of available loans compare. If underwritten preapproval is not an option, the buyer can request the most complete underwriting process available before making an offer. Strong backing by the lender can help a buyer make an offer in a market known for large buyer pools and bidding contests.
Getting Help From Someone You Know
A lender known to the buyer is called a private lender. The private loan is still a mortgage. If a private lender can finance the full mortgage, a buyer can negotiate a home purchase in a competitive market without the vetting and delays of institutional underwriting.
A private loan needs to be done correctly. A low interest rate is acceptable, but a loan with a rate oddly below the market rate can look more like a gift, and that’s a flag for the IRS.
☛ Gifts differ from loans. If someone offers to give you money to finance your home purchase, know how gifts and mortgages work together (or don’t). See Funding Your Mortgage: Gifts and Gift Letters on Deeds.com.
With the guidance of an escrow officer, the private lender places a signed promissory note (mortgage note) on the property, declaring:
- The amount of the loan.
- The term of the loan.
- The interest rate.
- A printed schedule of repayment, outlining the dates and frequency of payments (optional but strongly suggested to keep payments on track and contractual duties met).
- Penalties for not repaying the loan according to the above terms, including acceleration of the loan before the end of its term.
In short, the note must assure the lender that the borrower will repay the money according to the agreement’s terms.
In addition to the note, there is the mortgage document (in some states, a deed of trust). It names the homeowner and defines the home by its legal property description. It secures the home’s value to the note. And, yes, it makes foreclosure by the lender possible.
☛ With a deed of trust, a buyer pledges the value in a real estate asset to secure a loan. Read more at What Is a Deed of Trust?
Further, the mortgage document declares that the borrower must timely repay the principal and interest, and cover the necessary insurance, maintenance and taxes. (Interest on a private loan is deductible for federal taxpayers who itemize deductions.)
If the private loan means the buyer can make a cash offer, then the deal won’t be encumbered by the credit vetting, appraisals, and the uncertainty and slowdowns that accompany institutional mortgage underwriting. A private loan is a legal obligation nonetheless. It can have further consequences that the parties might not be aware of. We recommend seeking legal guidance from a local real estate attorney.
Growing Trend: Cash Offer Financing
Today, companies are financing cash offers to support the home buying process. The whole transaction can be done in ten days or less, some companies promise. After a purchase, the homeowner then repays the cash advance through a mortgage. These companies also offer to buy the homeowner’s current home to free up cash for the new purchase.
☛ Thinking about buying a new home? Read more about selling your current home while buying your next one. Our tips and strategies could help you create the perfect plan for you.
In March 2021, Opendoor started cash offer financing. Eligible buyers can make cash-backed offers in major cities in several states. This allows for bypassing financing and home sale contingencies for buyers who don’t have the cash at hand. First, a potential buyer can quickly find out if they’re pre-qualified with a mortgage company, which can be Opendoor Home Loans. Then, Opendoor assigns an expert to work with the buyer in creating the offer. The company claims its method doubles buyer success. It also promises to avert buyer’s remorse with a buy-back guarantee.
Other companies with cash-offer products include Accept.inc., a mortgage lender in Colorado that makes the cash offer and buys the home on the borrower’s behalf, reselling it later to the borrower. Another entrant, Homeward, can empower a buyer to waive the financing contingency and possibly win a bidding war. And Ribbon will buy a primary residence on behalf of a borrower, then allow the borrower 180 days to get a mortgage and officially buy the home. During that time, the home buyer temporarily rents the home from Ribbon.
Go Get ‘Em! Winning in a Competitive Market
It’s a tough game out there for buyers. Those looking to buy a home need to learn what strategies are available to help them get to closing. One possibility? Appealing to a seller with a cash offer. And that’s possible, even for buyers who need a mortgage.
As always, the information above is general, may not pertain to all states, and may change. We urge readers to consult their own real estate, financial and legal professionals before engaging in a home purchase or a related financing agreement.
Best wishes in winning the home that’s perfect for you.
Supporting References
Ilyce Glink and Samuel J. Tamkin for The Washington Post: How Does an ‘All-Cash Offer’ Work When Buying a Home? (Jul. 14, 2021).
Zach Wichter for Bankrate.com: Did You Lose a House to an All-Cash offer? Here’s a Little Secret Homebuyers Need to Know (Apr. 21, 2021).
Atlantic Bay Mortgage Group: Benefits of Working with Lenders Who Do Upfront Underwriting (May 2018).
Eddie Knoell for The Mortgage Brothers Show on AZMortgageBrothers.com: Buying a House With a Cash Offer and Simultaneously Getting Mortgage Financing (Signature Home Loans; Oct. 26, 2020).
Erik J. Martin for The Mortgage Reports: How to Make a Cash Offer on a House — With or Without Cash (Jul. 21, 2021).
Tom Willerer for the Opendoor Blog: Opendoor Introduces Cash-Backed Offers, Increasing Buyers’ Chances of Winning Their Dream Home (Mar. 3, 2021).
Laura Agadoni for MillionAcres.com: How to Pay for a House in Cash — Without Having the Cash (updated Jun. 9, 2021).
Photo credits: RODNAE Productions and Alexandr Podvalny.