In a competitive housing market, buyers may have to find creative ways to make an offer stand out. One way you can strengthen your offer is by offering to buy the home in cash instead of financing your purchase with a mortgage.
While making an all-cash offer may sound ideal, the truth is few people can afford to buy a home out of pocket. If you don’t have the funds on hand but still want to make a cash offer, there are cash-offer financing programs that make this possible.
Here’s a look at what a cash-offer program is, how it works, and the associated costs.
Key Takeaways:
- The steps to buy a house with cash-offer financing start with getting preapproved by a company that offers this type of service. The process ends with finalizing a mortgage to buy the home back from your cash-offer financing company.
- Cash-offer financing comes with additional costs, such as convenience fees.
- An advantage of using a cash-offer program is that it helps your offer stand out, and you may feel more comfortable waiving the financing contingency. A disadvantage is that you may have limited options to choose from.
What Is a Cash-Offer Financing Program?
When you make a cash offer to buy a home, it typically means you have enough liquid assets to not need a mortgage. But a cash-offer financing program can be a way to make an enticing cash offer, while still using a mortgage to finance your home purchase.
You’ll start by finding and getting preapproval from a company or lender that has a cash-offer program. The company will then make a cash offer on a home on your behalf. If your offer is accepted, the company will purchase the home while you work on closing your mortgage. You’ll then buy the home from the company using the funds from your mortgage.
With a cash-offer program, you get the benefits of making a cash offer — such as a quicker closing timeline, standing out in a competitive market, and feeling more comfortable with waiving the financing contingency — while still using a mortgage. However, you will have to pay convenience fees, and may be heavily incentivized to use the cash-offer program’s real estate agent or lender.
Cash-offer financing programs vs. cash offers
Sellers tend to favor cash offers because they allow buyers to skip a lengthy mortgage underwriting process and avoid the possibility that a loan will be denied.
The key difference between a true cash offer and a cash-offer financing program is that the latter still involves using a mortgage to buy a home. The process is just more complicated. You’re working with a company that finances your cash offer and purchases the home on your behalf.
There are two separate transactions when you use a cash-offer program: the purchase from the original seller, and the purchase from the cash-offer financing company. This can result in high taxes and fees.
True cash offers are more straightforward than cash-offer financing, but you need enough money on hand to buy the home outright. Given that the median home sales price in the first quarter of 2024 was $420,800, that’s a big ask for most people.
9 Steps To Make a Cash Offer on a House With a Mortgage
If you want to use cash-offer financing to buy a home, here are nine steps to take.
1. Find a cash-offer financing program
You likely won’t find cash-offer financing from a bank or credit union. Cash-offer financing is still relatively uncommon, so you may have to research companies online if you’re interested in using it. Make sure to do your due diligence and dig into a cash-offer financing company’s reputation before committing to it.
Some cash-offer financing companies also serve as lenders. Research potential lenders and ask whether they offer this service.
2. Get preapproved for cash-offer financing
The first step in any real estate transaction that involves a mortgage is getting preapproved.
The preapproval timeline begins with the lender or cash-offer financing company examining your financial situation, including your credit score, savings, and debt-to-income ratio. Based on that information, it will estimate the maximum loan you could qualify for.
In cases where the cash-offer financing company also serves as the lender, you’ll only need to be preapproved once. If the cash-offer financing company and the lender are separate, you’ll be asked to show a preapproval letter from a lender to be verified by the company.
3. Find an experienced real estate agent
Next, you’ll want to find a real estate agent who’s experienced with cash-offer financing. Some cash-offer financing companies require or heavily incentivize hiring an agent that it provides.
Your agent can help you learn more about your local housing market and guide you to properties that may interest you. They’ll also help you make an offer on a home and negotiate home prices.
4. Shop for a home
Work with your agent to shop around for a home. Provide your agent with information about your wants vs. needs in a property, and let them know the type of loan you’ve been preapproved for. Your agent can help you make a list of homes that are within your budget, and help you schedule showings for those homes. They’ll also let you know about house tours in your area.
Do your due diligence when shopping for a home. After all, a home is a major investment. Think about its location, nearby amenities, traffic in the area, and anything else that could affect your quality of life after moving in. Also make sure you can afford the home by using a mortgage calculator to run the numbers and estimate what your monthly payment will be.
5. Make a cash-backed offer
Once you find a home that you like, you can make a cash-backed offer. Sellers are typically enticed by cash offers because they close faster, and the transaction won’t fall through because of a financing contingency. A cash offer can help you succeed in closing on the home you want.
6. Pay earnest money to the cash-offer financing company
When you submit an offer to buy a home, you’ll need to put down some earnest money to show that you’re serious about the purchase. This earnest money may be taken by the cash-offer financing company once you close to help pay the convenience fee, which is typically 1% to 5% of the purchase price.
7. Obtain a title report
During any real estate transaction, confirming that the seller has clear title to the home is essential. In the worst case, you could find that the seller didn’t have the right to sell the home, leaving you in the middle of a legal nightmare and costing you the hundreds of thousands of dollars you spent on the home.
Hire a title company to conduct a title search and produce a title report to ensure there are no liens on the property. You should also get title insurance, just to be safe.
8. Close on the home with the cash-offer financing company
The next step is for the cash-offer financing company to close on the home. The company you’re working with will purchase the property from the seller. You can then move into the home and start paying rent to the cash-offer financing company while you work through the rest of the process.
9. Buy the home back with your mortgage
After you move into the home, you can finalize your mortgage application, whether that’s with the cash-offer financing company or a separate lender. This should go relatively smoothly, considering you got preapproved for a mortgage and cash-offer financing.
If the cash-offer financing company and lender are the same, the process should be simple because you’re working with the same entity. If they’re separate, then it may take some time for the lender to approve your mortgage. You’ll be charged daily rent based on local rates until your mortgage is approved.
Once you’re approved, you can use the loan to buy the home back from your cash-offer financing company. This completes the process, and you’ll finally own the home.
If you don’t get approved for a mortgage, you’ll likely still have to forfeit the convenience fees, any earnest money you put down, and any rent you paid.
Costs of Cash-Offer Financing Programs
Cash-offer financing programs let you strengthen your offer to buy a home, but these companies charge fees for their assistance. You must decide whether the cost is worth paying to make your offer stronger.
Some common costs include:
- Convenience fee. Most cash-offer financing companies charge this fee to compensate for the work they do to let you make a cash offer. You could pay around 1% to 5% of the home’s value, or a flat fee of a few thousand dollars.
- Real estate transaction fee. Some cash-offer financing companies require or heavily incentivize using its agents. You may have to pay your agent a fee to process and handle the paperwork associated with closing on a home.
- Mortgage closing costs. Some cash-offer financers also are lenders, so you’ll pay typical closing costs if you use them for your mortgage.
- Interest charges. You’ll pay interest on the loan to the cash-offer financing company if it also issued your mortgage.
- Rent. With cash-offer financing, you can sometimes move into the home before you officially own it. You’ll pay rent to the cash-offer financing company during this period. Some will apply a portion or all of the rent paid to the purchase price of the home when you buy it back.
Pros and Cons of Cash-Offer Programs
Before you opt for cash-offer financing, it’s important to consider the pros and cons.
Advantages of cash-offer programs
Some advantages of using cash-offer financing include:
- Your offer stands out. Cash offers can have a big advantage over the competition because the seller won’t have to worry about the buyer’s financing falling through. In July 2023, 26% of homes were purchased by all-cash buyers.
- More negotiating power. Eliminating the financing contingency from your offer means you can be more aggressive in negotiating other aspects of the sale, such as including a home inspection contingency.
- Quick closing timeline. In ideal circumstances, closing with a cash offer can take less than 10 days. Closing with a mortgage often takes more than 30 days.
- You can move in sooner. With cash-offer financing, you could move in as soon as the cash-offer financing company closes on the home — though you may have to pay rent if it takes a while for your mortgage to be approved. Given the quicker closing timelines associated with cash purchases, that means you can move into the home sooner.
- Potentially less homebuying stress. Buying a home can be incredibly stressful, and waiting to hear back on an offer is especially nerve-wracking. Cash-offer financing can help alleviate stress about the strength of your offer.
Disadvantages of cash-offer programs
Cash-offer financing isn’t perfect. Before you use it, make sure you understand the drawbacks, which include:
- Cash-offer financing can be complicated. Cash-offer financing is more complicated than using a traditional mortgage or making a true cash offer to buy a home. This is especially true if the cash-offer financing company and the lender are separate entities.
- Higher rates and fees. “It’s important to note that this type of financing may involve higher interest rates and fees, as well as a shorter repayment period,” says Velody Foye-Byrd, founder of Eagle Home Partners, a Clayton, North Carolina-based homebuying company. “It’s crucial to carefully evaluate the financial implications before choosing this option.”
- You may be required to use certain agents or lenders. Some cash-offer financing companies only work with specific real estate agents or lenders, or heavily incentivize working with their selected partners by charging higher fees if you don’t. This can make it difficult to compare rates and find the best deal on a mortgage.
- Limited options. Cash-offer financing is relatively uncommon, so you’ll have limited companies to choose from.
- Your cash offer might not be as strong as you think. Cash offers have grown more popular in recent years. More than a quarter of home sales are done using cash, so you’ll still be dealing with competition. Your offer may not stand out if a seller receives multiple cash offers.
- You may lose money if your cash-offer financing falls through. Although it’s rare, cash-offer financing can fall through. For example, you may be unable to secure a mortgage to buy the home back from the cash-offer financing company. If that happens, you’ll lose out on the fees and any rent you paid.
Should You Use a Cash-Offer Program To Buy a Home?
Cash-offer financing can let homebuyers strengthen their offer on a home, even if they don’t have the funds to make a true cash offer.
“A cash offer is seen as a much stronger offer because there is no need for underwriting or an appraisal, which means the settlement can take place a lot faster,” says Anthony Kirlew, a Realtor at eXp Realty in Tempe, Arizona. “If the seller is buying another property and they need the funds from their sale to close, a cash offer will give them more confidence to move forward with their purchase.”
However, cash-offer financing can be complicated and costly, and may not be necessary in less competitive markets. You may be better off using your money to make a larger earnest money deposit or a bigger down payment to strengthen your offer.
But if you live in a highly competitive real estate market, you might consider cash-offer financing, especially if you have been shopping for a home for a while and keep losing to cash offers. It may be what you need to be able to submit a winning bid.
Cash-Offer Financing FAQ
Here are answers to some frequently asked questions about cash-offer financing.
Cash-offer financing can hurt your credit, but not any more than applying for a typical mortgage would. You’ll have to get preapproved and ultimately approved for a loan, which requires credit checks and adding new debt to your credit report. These things can cause your score to drop. However, over time, your score will bounce back if you make your debt payments on time and in full.
Yes. While cash offers typically don’t require an appraisal prior to closing, mortgages do. You’ll typically need an appraisal when you apply for a mortgage to buy the home back from the cash-offer financing company.
The Bottom Line on Cash-Offer Financing
Cash-offer financing gives people who need a mortgage to buy a home a way to strengthen their offer. However, this comes at a price, and the process can be complicated. Consider whether the cost of cash-offer financing is worth paying for, and carefully read the details of your cash-offer financing program to make sure you understand how it works — and any pitfalls to watch out for. If you do your due diligence, cash-offer financing can be an effective way to strengthen your offer and make a winning bid.
