June ABODE: Got cash? The lowdown on buying a house loan-free

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Buying a home with cash. The phrase evokes images of lugging a large suitcase stuffed with bills to closing. What does it really mean and what’s involved?

Buying with cash means the buyer has the money available to purchase the house outright; he or she doesn’t have to secure financing from a lender to facilitate the transaction.

The way it usually works is the buyer has her bank write a certified check—which can also serve as proof of funds—made payable to the title company. The buyer then brings that check with her to closing.

The title company confirms the funds are available. They also check that no liens were placed on the property at closing (there was a time when it wasn’t unheard of for an unscrupulous seller to borrow against the house right at closing, leaving the new owner saddled with surprise debt).

The primary benefit to buying a home with cash is that you’re able to cut out the middle man—the lender or mortgage company—which results in significantly less closing costs, which often run into the thousands of dollars.

A cash buyer gets to sidestep the usual lender charges such as “loan origination” fees and other wallet gougers. For example, you don’t have to shell out the estimated $300-600 for a mortgage application. You don’t have to cough up the estimated $500-750 on up to pay a bank attorney for the mortgage. You don’t have to put real estate taxes in an escrow account. You don’t have to pay $400-600 for an appraisal, which a buyer going through a lender is required to do, sometimes multiple times. Without a lender, you don’t need to get an appraisal at all.

Title insurance will also drop. Title insurance protects buyers from preexisting claims like unpaid property taxes or liens placed by contractors who never got paid. But a significant percentage of it goes toward protecting the lender; if there’s no lender, that money stays in your pocket. Without a lender, in fact, you can elect not to purchase title insurance at all (though it’s recommended).

There are benefits to a cash purchase for sellers as well. Sellers get to avoid the usual anxiety and heartache of a sale not going through at the eleventh hour because the appraisal, required by the lender, turned out to be less than the agreed-upon price, causing the buyers to either demand a reduction…or walk.

For sellers accepting a cash offer, it’s extremely important to see proof of buyers’ funds prior to closing, not only from the buyer’s bank certified check but a recently dated bank statement (account numbers blacked out) or letter from the bank’s manager confirming the funds are indeed there. This is one check you don’t want to have bounce.

There aren’t many drawbacks to buying with cash (it’s king, after all) but there is one consideration to keep in mind.

By sinking so much money in one property, you leave yourself less (or no) money available for other investments. That may not be important to someone just looking to purchase one nice “forever home,” but you stand to increase your net worth over the long term—especially considering the historically low interest rates at the moment—by using that chunk of money as a down payment on two or even three properties, using a lender to finance the rest.

Think of it this way: Donald Trump didn’t get to be where he is by buying one property at a time, but by buying multiple properties at a time, using someone else’s money to do it.—Jessie Knadler

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