Many buyers want to pay cash if they could and sellers would love to have a cash buyer as well. But, even though a buyer may be able to pay cash for a home, it could be a financial trap or missed opportunity to not explore options. First of all, a buyer should feel accomplished to have the ability to pay cash for a home. Working hard and saving up the funds to do such is quite the accomplishment! For this reason, it is key not to jump into spending the hard earned investment.
Consider a Loan Even if You Can Pay Cash
Building a financial portfolio large enough to be a cash buyer is quite the accomplishment. There are many routes one could take to achieve this level of funds.
- Paying off current home over time
- Flipping homes – buying and selling homes for profit
- Solid investments into a retirement account
- Put money into savings
No matter the route taken to get to the point of being a cash buyer, it is a great feeling. Congratulate yourself! But, we encourage a buyer not to spend the investment so fast. Sure, it feels good to pay cash and it may provide an advantage in negotiating a purchase. But, the potential unforeseen costs and missed opportunity are reasons to put much thought into the decision.
Cash Buyers Should Involve Professionals in the Decision
Buyers which have amassed enough cash to purchase a home should already have a team of financial professionals. If not, there is no better time than the present to find the right advisors. These professionals include a CPA, financial planner, investment banker/trader, and yes a mortgage professional. Consulting with professionals is key to making a sound and very important decision.
Cash Buyer Consultation With a CPA
As mentioned, paying cash means pulling funds from one asset to purchase another. Doing such usually involves potential costs (taxes) or potential opportunity (income or wealth building). That is why it is key to involve a CPA in the decision process. Determining potential tax implications is key when pulling funds from retirement or investment accounts, moving an inheritance, or selling another property. With the new tax laws which started in 2018, there could be reasons to pay cash or finance the property.
But, it isn’t just about avoiding the tax man! There are potential opportunities to continue or expand an income source from an existing asset or a many other opportunities. So, don’t just think of your CPA as someone to lower your tax bill. A CPA can help build strategies to support a financial plan.
Involve Your Financial Planner in a Cash Buyer Decision
Speaking of a financial plan, a financial planner is a key team member in this life decision. A financial planner helps clients align their investments with their goals, situation, and risk aversion. If a buyer were to pull $200,000 or $300,000 out of an account or asset, it could totally contrast the existing plan. There are other areas to consider when pulling funds for a cash purchase.
What is the timing of the market and state of your investments? There are reasons to keep funds in place and reasons to move the funds elsewhere. Removing funds from investments to a home will involve a discussion about potential loss of income stream and the affect on the wealth building plan. Additionally, a buyer’s age may play a role in the decision. This is especially true when near retirement agent, between early and full retirement age, or already in retirement.
Cash Buyers Should Consult a Mortgage Loan Officer
“Did you hear me? I am paying cash and I don’t want some loan officer to try and talk me into borrowing money! “. That may be an answer from a cash buyer when advised to speak to a loan officer. But, it is best to know the options when buying a home. Consulting the rest of the team, but leaving out the mortgage loan officer is like driving a car with only 3 wheels.
“I don’t want to waste a loan officer’s time”. That’s a legitimate concern. But, a professional loan officer understands the importance in a cash vs mortgage decision and should welcome the opportunity to advise. In the end, the best answer may be paying cash. But, at least it is an informed decision after consulting with a team of professionals.
Know Mortgage Options to Keep Your Cash
Obviously getting a mortgage means there will be a mortgage payment (except reverse mortgage purchases). This goes against the mindset of paying cash. But as mentioned above, there are reasons not to spend your cash. What are the loan options then? Well, that depends on the borrower’s scenario.
Veterans have a wonderful option in a VA loan that allows up to 100% financing.
VA loans are known for being a no money down purchase. But, down payment is allowed. VA loan costs actually decrease with 5 or 10% down. Additionally, a disabled Veteran could be exempt from the VA funding fee. Plus, it doesn’t have to be no down payment. Actually, a down payment lowers the costs of a VA loan. For higher priced homes, VA jumbo loans help finance over the conforming loan limit of $453,100. VA jumbo benefits often beat conventional jumbo financing. Partially or fully financing a home with a VA loan is certainly an option to consider versus paying cash.
USDA Rural Development Offers No Money Down Purchase
Contrary to popular belief, most areas in the U.S. are USDA eligible and the income limits are pretty liberal. Even entire counties like Brunswick County, NC are eligible for USDA Guaranteed Loans. Since we are talking about cash buyers, there is one important thing to remember. If a buyer has 20% of the sales price in a liquid account, USDA will deny the file. Yet, a buyer that has large retirement accounts will not cause a problem with USDA. So, the USDA advantages make it a viable option for those looking to keep assets in place and finance the whole purchase price.
Conventional financing has many options
Fannie Mae or Freddie Mac conventional loans, if anything, offer borrower flexibility. Thus, it can cover anywhere from a large down payment to as low as 3% down. Whether there is a large down payment or just 3% down, conventional loans can help. Furthermore, there are great payment options for less than 20% down loans. These include lender paid PMI and other great strategies for lowering payments. Instead of spending all cash, use a smaller conventional loan. This is also the way to finance a second home or investment property as well. Getting a 30 year term to help the property cash flow better is pretty tempting. Keep funds in place, maybe avoid taxes, and have a smaller payment. Sounds like a win,win!
Flexible guidelines of FHA loans
Buying a property for a business? We know it may feel like banks are asking for everything other than a blood sample. But there is some very attractive commercial property financing available. Even with extended terms to help with cash flow.
Sometimes buyers pay cash just because the home’s condition will not work for a mortgage. Also, the buyer may feel buying the home in it’s current condition would lower the price. Maybe there is an unfinished addition, the floors need replacing, or the home is just trashed. A traditional mortgage will not allow such. But, that is right up a renovation loans alley! Benefits of renovation loans include:
- Buy the home in “as is condition”
- Possibly buy at a lower price
- Include funds for renovations and purchase in one loan
- Keep cash and investments in place
- Options to include minor to major improvements
- Repair flood damage or raise the foundation
Creative Ways to Purchase a Second Home
A lot of vacation home buyers pay cash. Although often it is because the alternatives have not been discussed. Maybe it is because a borrower just thinks that the mortgage process is too tough. Of course, there are the traditional mortgage options of 10% – 20% down payment. But, there are also creative ways that could work better. The first creative option includes a VA cash out refinance up to 100% of the primary residence value. Additionally, a conventional cash out refinance on a primary residence or other property. Other creative options include using a reverse mortgage which we explain below. Read “6 successful mortgage options to purchase a second home so you don’t have to pay cash.”
Senior Citizen Alternatives to Cash
Seniors have worked most of a lifetime accumulating enough to have the option of paying cash. Certainly being a cash buyer is an option, but there are special options available to buyers 62 and older. A reverse mortgage, at a surprise to most, may be used to purchase a home. The best part is that there is no required mortgage payment! Although, an owner must continue to pay their property taxes, insurances, and association dues. There are a few advantages related to this topic. Primarily, buyers pay cash so that there is no mortgage payment. A reverse mortgage may allow a buyer to preserve cash or investments, while having no mortgage payment.
Sometimes even seniors may look to buy a home while keeping another as a second home. A reverse mortgage allows for this as long as the property with the reverse loan is occupied over half the year. Additionally, reverse mortgages allow seniors to access cash from a primary residence to buy a second home too. Reverse mortgages are not for every situation, but it can provide a senior buyer flexibility, income tax avoidance, and comfort during later years.
Consider all the Options Before Paying Cash
Whether you are a realtor, builder, or buyer, don’t jump so fast to the cash option. As we have shown here, there are strategies to consider. Yes, you do have to provide more documentation for a mortgage than as a cash buyer, but too many times we see advisers wish the nest egg wasn’t fully spent on a house. Plus in an emergency, you can’t access your equity in a hurry. A liquid emergency fund is accessible though. Therefore, consider the potential advantages of a mortgage loan and keeping the cash in place. Either way, we are happy to discuss the options with you so that you are making an informed decision. Cash or mortgage.