When house hunting, you may come across listings that use the phrase “cash-only.” This differs from a regular property because a mortgage lender is unlikely to approve financing for such a purchase.
The exact reasons for this vary, but cash-only homes are often foreclosed, distressed, abandoned, condemned, or flood-damaged. Sometimes, the property simply has a few features the seller knows a bank wouldn’t approve of, but they don’t want to put the money into fixing it.
If you’ve found a cash-only home you’re interested in buying, learn your options for financing the purchase. Then, consider the pros and cons of a cash-only sale.
How to Buy a Cash-Only Home
While the phrase implies that buyers only have one choice, there are actually multiple ways to fund a cash-only home purchase.
Pay in Cash
Obviously, the intended way to buy a cash-only home is to pay in cash. But this doesn’t mean you hand over a briefcase full of hundred-dollar bills. Instead, you pay the agreed-upon amount via a certified check or wire transfer to the seller.
Take Out a Hard Money Loan
Not everyone has the money to buy a cash-only home with no financing whatsoever. That’s where a hard money loan (HML) comes in. This is a short-term, high-interest loan from a private investor. Since HMLs don’t come from a bank, they don’t follow the same guidelines.
For instance, hard money lenders focus on the property, not the borrower. They also consider the estimated value once the buyer makes repairs. This differs from mortgage lenders that only look at the property’s current value without considering its future potential.
Take Out an FHA 203(k) Rehab Loan
A government-backed loan called the FHA 203(k) is an option for homes that require major remodeling or structural repairs. Both new homebuyers and existing homeowners may qualify for this loan.
The Federal Housing Administration offers several types of FHA loans. Even the FHA 203(k) comes in two forms:
- The standard 203(k) program covers major renovations on a purchased or refinanced home. Loans can range from $5,000 to 110 percent of the home’s after-repair appraisal value. Commonly financed projects include kitchen or bathroom remodels, structural additions or alterations, new flooring, energy-efficient upgrades, and appliance replacements.
- The limited 203(k) program provides financing for properties that can be repaired, remodeled, or updated for $35,000 or less. Because of this relatively low cap, the limited loan is great for cosmetic upgrades and improvements such as new flooring, plumbing repairs, and window and door replacements.
FHA 203(k) loans require extra documentation and take longer to close than a traditional mortgage, but they could be suitable for some cash-only situations.
Benefits of Buying a Cash-Only Home
Is it in your best interest to buy a house listed as cash-only? Consider these benefits:
- Faster sales process: Since you don’t have to wait for a mortgage application to go through, you can usually close on a cash-only purchase within a week or two. This benefits buyers and sellers alike, allowing both parties to move on quickly rather than dragging out the sale.
- Fewer qualifications: Mortgage lenders consider the borrower’s financial standing as part of the application process. A cash sale avoids the need to field questions and fill out stacks of paperwork.
- Great investment potential: Cash-only homes tend to cost less upfront because of their distressed condition. Skipping a mortgage also means no fees or interest. Even if you borrow an HML, you can expect to pay off this short-term loan relatively quickly. Most real estate investors fix and flip the home within six to 12 months, using the proceeds to pay off the loan while pocketing the rest.
Drawbacks of Buying a Cash-Only Home
Purchasing a distressed or abandoned property isn’t for everyone. Keep these drawbacks in mind before moving forward:
- High opportunity cost: When you invest a large sum in a cash-only property, your money becomes illiquid. There’s no way to get it back unless you sell the property, which could take years or longer, depending on its condition and the current market. Tying up everything you have in one investment is risky, so make sure you have a contingency fund for other investments and expenses.
- No way to back out: Financing a home makes the sale contingent on the mortgage, giving you a way out of the contract if you change your mind. But you lose this flexibility when you pay in cash, meaning you’re legally obligated to fulfill your end of the agreement once you sign the contract.
- Possibility for hidden complications: Cash-only homes usually have a long list of problems. If certain issues crop up after you sign the contract or end up being more costly to repair than you anticipated, this could decrease your profit margin. It’s also vital to conduct a title search to ensure the owner does, in fact, hold the deed to the property. Otherwise, ownership disputes could arise later on.
Start the Process of Becoming a Homeowner
Whether you want to finance a traditional home purchase or have your eye on a cash-only listing, Financial Concepts Mortgage can help. As Oklahoma’s premier mortgage lender, we offer competitive rates on numerous home loan options, including FHA 203(k) programs. We’re proud to be a locally owned mortgage bank, not a mortgage broker, allowing us to provide in-house loan origination, processing, underwriting, and closing. For more on why we’re the best choice for home loans in Oklahoma City, please contact us at (405) 722-5626.