Competition is heating up in real estate markets across the country as homebuyers struggle to make their offers stand out from the pack. Homes fly off the market in days, not weeks; offers go well over asking price; and bidding wars are increasingly the norm.

If you’re in the process of trying to buy a home, you don’t need us to tell you that when it comes to bidding on a home, cash is king.

“There’s basically six levels of buyers in the marketplace right now, and the No. 1 buyer is obviously the cash buyer” explains top Long Beach, California agent Ramon Sanchez, who works with 77% more single-family homes than the average area agent. “So you’d be at the top of the list above the other buyers.”

According to Sanchez, the six levels of buyers are:

  1. All-cash buyers
  2. Buyers using financing and putting down 20% or more
  3. Buyers using financing and putting down between 10% and 19%
  4. FHA and VA buyers with low down payments
  5. First-time buyers
  6. Anyone asking the seller to help them with closing costs

But why, exactly, is cash at the top of the list? How do cash home purchases work? And is there any reason you wouldn’t want to pay cash for a home?

HomeLight’s got all the answers you need right here! We’ve interviewed top experts in the field to unpack buying a house with cash: here’s just about everything you need to know.

A pen used to sign documents when buying a house with cash.
Source: (John Jennings / Unsplash)

What’s a cash offer?

A cash offer simply means you have all the money you need to buy the home in cash. If you’re using cash, you’ll have to show proof of funds with your offer.

Then it’s a matter of completing your due diligence: clearing the home’s title, getting a home inspection, confirming the home’s price (through an independent appraisal, if you choose), and closing the transaction.

How buying with cash is different from a mortgage

Buying a home using cash is pretty much the simplest real estate transaction you can make. That’s because you’re removing an important third-party: the lender.

Typically, with a financed offer — that is, one that’s backed by a mortgage — your offer is contingent on the mortgage going through successfully. Because of the due diligence involved with issuing mortgages, it takes a lot longer to close on a home with one.

According to Jessica Sanchez, Head of Mortgage Operations at HomeLight Home Loans, this due diligence is two-fold: the lender also needs to check out both the borrower and the property to make sure it’s safe to lend money for the home purchase.

“We have to ensure that the property appraises, and that it isn’t rotting and termite-infested and falling down. We have to ensure that the borrower is employed, that their income is viable. We have to verify down payment assets. And all of those things take time,” she adds.

According to the latest homebuyer data, closing with a mortgage takes an average of 57 days for home purchases.

How long does it take to close with cash?

One of the biggest benefits to buying a home in cash is the time you save on closing.

Once you remove financing requirements from the mix, a cash home purchase can close in around one to two weeks, depending on how smoothly everything goes.

“You can actually close escrow in seven days, as long as we get all our paperwork in — meaning from the title and escrow companies,” shares Ramon Sanchez.

That’s not to say delays can’t happen on cash purchases — unfortunately, delays can happen with any home purchase. But in general, cash is way faster than using a mortgage.

By now, you can probably understand why sellers are partial to cash offers: These deals are much quicker and come with more certainty than you get with financed buyers.

Should you buy a house with cash?

Of course, buying a home for cash isn’t for everyone. For one thing, you need to have the cash (though all-cash offers are being increasingly made available for homebuyers that don’t have the entire purchase price in cash through special programs like our own HomeLight Cash Offer).

The reality is, saving for a cash home purchase can take a really long time — decades in some cases. Plus rising home prices often outpace what you’re able to put away for your purchase.

But let’s say you have the money and you’re ready to plunk it down on a home. It’s probably a good idea to understand the pros and cons of buying in cash first, right?

Pros of buying in cash

“Cash is king” is the adage you hear over and over again. But why? Let’s walk through the major benefits of paying all-cash for a home.

Cash offers are more competitive

Sellers love cash for its quickness and ease. Having cash is a surefire way to make your offer heard across your local real estate market. If a seller is looking to unload their home quickly, there are few better ways to do it than sell to a cash buyer.

Avoid common mortgage contingencies

One of the reasons cash purchases are so beloved by sellers is because they come without common mortgage contingencies.

Mortgage contingencies are contractual stipulations that must be cleared before you can get a home loan. These contingencies are a pretty big deal to sellers, especially since they’re responsible for 37% of closing delays and 21% of contracts that fall through entirely.

The two most common mortgage contingencies include:

  • Financing contingency: The buyer’s finances need to check out to lend them the money.
  • Appraisal contingency: An independent appraisal company assesses the value of the home to make sure the mortgage company isn’t lending the buyer more than it’s worth.

When you pay in all cash, you can forgo these contingencies, speeding up and simplifying the home purchase.

Quicker, easier closing

Without lenders and contingencies in the mix, you’ll save major time and stress with your all-cash home purchase. With cash, you can close on your new home in as little as one to two weeks and do it with much less paperwork. Plus, you can remove the uncertainty that a third party (the lender) may not approve the deal.

You could save money on the home price

Depending on the specifics of the property and its location, sometimes you can save money on the purchase price with a cash offer. That speed and certainty that cash provides? Like we said, sellers love it, and sometimes they’re willing to take a hit on the home price to get it.

“Sometimes when you have a cash buyer, you can come in with a little bit lower price,” shares Ramon Sanchez.

However, he cautions, whether you save money on the listing price largely depends on the competition in your market and the priorities of the seller.

Sanchez says that when a seller needs to find and purchase a new home to move into while they’re selling their current home, they tend to go with the highest offer. This gives them more time to find a new home.

On the other hand, when a seller needs to be out of a home quickly, they’re probably more likely to turn to a cash offer, even if it’s a bit lower.

Fewer fees

Did we mention that most mortgages come with some pretty serious fees? If you go the home loan route, you can expect lender fees to tack on up to 3% to your home purchase.

Though it should be noted that these lender fees are entirely optional, based on the lender you choose — HomeLight Home Loans doesn’t charge any!

Still, most major lenders do charge them, and they typically have to be paid at closing as part of your closing costs. If you pay in cash, you can avoid lender fees entirely.

No interest

Another way you’ll save money with an all-cash home purchase? You won’t pay any interest on a home loan. That could save you huge over the years — tens, if not hundreds of thousands of dollars!

Let’s say you’re purchasing a $250,000 home.

You decide to go the 30-year fixed mortgage route. You put down 10%, or $25,000, and finance the remaining $225,000 at 3.8%.

With interest, you’d pay $377,425 for that home over 30 years.

If you bought in cash, you’d pay $250,000 today and save $127,425 on interest.

A luxury house purchased with a mortgage instead of with cash.
Source: (Ebun Oluwole / Unsplash)

Cons of buying in cash

Cash may be king, but buying a home in all-cash has some surprising downsides to consider.

You’re not leveraging your money

When interest rates are low like they are in today’s home market, it may not make sense to pay cash for a home, especially if you could put that money to better use elsewhere.

“Mortgages are essentially really cheap for OPM — which is short for other people’s money,” explains top California real estate agent Jordan Clarke. Using other people’s money to buy a home allows you to invest your money better.

Saving cash takes time, and you’re missing out on equity in the meantime

Most homebuyers don’t have several hundred thousand dollars lying around. They need to save to accumulate enough money to buy a home.

But in some markets, it’s simply not plausible to save up enough to buy a home in cash. For example, in Tucson, Arizona, it would take a median wage earner 12.5 years to save up enough for a $150,000 starter home — and that’s assuming home prices don’t go up at all. In reality, they’re currently rising 19.2% year over year.

In many markets, rising home prices outpace what you’re able to save. And even if you were able to save enough cash to buy a home outright, and it took you more than a decade, you have to consider the opportunity cost: You could have instead spent that decade owning a home, paying down your mortgage (which grows your equity in the home), and adding to its value through improvements.

Lack of liquidity

Another con of going all-cash on your home purchase? You’re reducing your liquid assets. Once your cash is tied up in a property, it becomes much more challenging to access it.

Equity is a great wealth-building tool for the long term, but what if you need cash today? You’d need to sell or refinance your home to get any cash from it, which puts you right back in home loan territory.

Sometimes it’s better to have that cash on hand now in case of economic downturn or an emergency situation. Or perhaps that cash would better be spent on home improvements and upkeep.

No mortgage interest tax break

Buying a home with a mortgage comes with a few distinct advantages, and one of them is the mortgage interest tax deduction. You can deduct the interest you pay on your mortgage for a home up to $350,000 (if you’re single), or $750,000 if you’re married and filing jointly.

If you buy in cash, you’ll get no such tax break.

Limits your budget

Cash limits your budget since you’re restricted to, well, the amount of cash you have. If you were to use some of that cash for a down payment instead, you could afford a pricier home.

Of course, you’ll have to make mortgage payments and pay interest if you go that route, but it might be worth taking on a mortgage if you can get into a nicer home that fits your longer-term needs.

You could actually end up paying too much

It seems counter-intuitive that you could end up paying too much on a cash purchase, but hear us out.

While it’s true you may be able to knock a little off the purchase price with cash, there’s also another side to consider: It can be a risk to forgo the appraisal.

The lender requires an appraisal so they don’t overlend on the property. But as a buyer, the appraisal protects you, too.

Sellers love to skip the appraisal — it pretty much only signifies a potential roadblock to them. But it can be less advantageous for you, the buyer, to skip the appraisal — especially in a hot markets where bidding wars are the norm, which can lead to price inflation.

“I always recommend buyers make the investment and make sure you get an appraisal done. You still want to know what you’re buying,” Ramon Sanchez advises.

You can even include an appraisal contingency in your offer, but beware that this could make your all-cash bid slightly less attractive to sellers. The ease and quickness is pretty much the point for them. Removing it could mean a less competitive offer.

Physical cash is not recommended when buying a house with cash.
Source: (Katie Harp / Unsplash)

How do you pay cash for a house?

Paying for a home in cash sounds great, but what are the mechanics like?

It’s pretty simple, really: It’s buying a house (or land!), but without the mortgage. We’ll get to the process of buying a home in cash in a minute!

Can you buy a house with physical cash?

But first, you might want to know: Are we talking physical cash here? Like, can you show up on closing day with a suitcase full of cash?

Technically, yes, you can. But should you? No, you most likely should not try to buy a home with physical cash. Carrying around that much cash is risky, and counting such a large sum can be challenging.

“Cash doesn’t have a place in real estate — no one wants a pile of cash to count,” shares top Tennessee real estate agent Sherry Ludecker.

Most all-cash buyers stick to wiring the money, just like you would if you were buying a home with a mortgage.

What’s the process for buying a house with cash?

Step 1: Make an offer

To make an all-cash offer, you’ll need proof of funds. That usually means you want your cash in one account. The financial institution will issue you a letter stating that the funds are available. You’ll submit this letter to the seller with your offer.

Before you take this step, it’s probably a good idea to talk to a trusted financial advisor to make sure you understand the implications of cashing out any assets or accounts. You’ll also want to make sure you have a great real estate agent on your side to help you create a competitive offer strategy.

Step 2: Deposit your earnest money

Your offer was accepted — congrats! If your bid includes an earnest money deposit (a good faith upfront deposit you make to show the seller you’re serious about buying their home), you’ll need to write that deposit check at this point. The EMD check is held in escrow while the purchase is finalized.

Typically, a cashier’s check will do, but make sure to have your agent double-check on acceptable forms of payment.

Step 3: Do your due diligence

Now you’ll do your due diligence on the property, including:

  • Title search: To verify that no one else can make any claims on the property.
  • Home inspection: To ensure the home is in good shape and all systems work properly.
  • Appraisal: To confirm the property’s value so you can make sure you’re making a good investment and not overpaying for the home.
  • Land survey: To establish your property lines. [This one’s optional, but it may be important depending on the property (they’re particularly helpful when you’re buying large rural properties to establish your lot lines). Consult with an agent or attorney to decide if a survey is the right step for you.]

Just because you could skip some of this due diligence doesn’t necessarily mean you should.

Remember: This step is how you’ll protect your investment. And when you’re paying cash, you’re the one shelling out for 100% of the investment. So it’s not the place to skimp on your due diligence!

Step 4: Secure homeowner’s insurance

Technically you don’t need to get homeowner’s insurance when you pay for a home in cash (mortgage lenders require it), but why skip it? If something happened to your home, you’d be on the hook.

Homeowner’s pay an average of $1,445 annually for their insurance premiums — or around $120 per month. Considering the cost you could shoulder if your home was damaged by a weather event or experienced a fire, homeowner’s insurance is relatively inexpensive for the protection it provides.

Step 5: Wire the money and close

Once everything checks out, and you’ve secured insurance, you’re ready to close!

“A day or so before the closing, or maybe the day of the closing — as long as it’s in the morning — the buyer wires in the cash,” explains top San Diego real estate agent Daniel Beer.

“It’s the simplest process you can have. It’s cash! You just wire the money, and you close.”

Make sure you check with your financial institution on wiring timelines — some cash deals can get held up by wiring delays.

A neighborhood of houses bought with cash.
Source: (Maximillian Conacher / Unsplash)

Top tips to compete with cash offers

“Okay,” you might be thinking, “cash sounds great — unfortunately, I don’t have that much.” That’s fair! Very few homebuyers do have that kind of money lying around. That’s why around 87% of homebuyers use financing.

If you’re in a competitive market where cash offers are the norm, there are still plenty of ways to compete. Let’s walk through a few.

  • Use a lender with a local presence. They have strong local relationships with agents, and those connections can help you get the deal done.
  • Get underwritten upfront. When your lender verifies your finances upfront before you make an offer, your financing is less likely to fall through. Sellers love more certainty!
  • Give the seller what they want. Find out what’s most important to the seller: closing timeline, offer amount, ease of transaction (for example, they don’t want to make repairs), and so on. Try to meet their needs with your bid.
  • Offer more. This may not be possible in all scenarios, but using a mortgage might mean offering a bit more than you would if you paid cash. So long as the appraisal checks out, this might be one way to overcome the cash competition.
  • Use a cash purchase program. What if we told you that you could make an all-cash offer, but still use a mortgage to finance your home purchase? It’s not magic; it’s our HomeLight Cash Offer program — and it’s life-changing for buyers in competitive markets.

Whatever route you decide to go with your home purchase — mortgage, all-cash, or a little bit of both with a cash purchase program — it always pays to have a top real estate agent on your side who can guide you safely through the process.

Header Image Source: (Investment Zen / Flickr via Creative Commons Legal Code)