There are so many reasons NOT to be a Cash Buyer
Becoming a cash buyer is not easy and usually takes dedication over time. So it usually doesn’t happen overnight. Therefore, don’t put on the blinders and only consider paying all of that hard earned investment on a house.
There are a lot of ways to build a lump sum to buy a home free and clear. One way is to meticulously make payments for 30 years on a mortgage. Another may have been buying and selling at the right time so that there is a sizable profit to invest. Maybe there were consistent investments into a 401k or IRA account. No matter the route taken to get to the point of being a cash buyer, it is a great feeling. Congratulate yourself! That is a great achievement! But it also deserves your attention and the advice of professionals prior to paying cash.
Involve Professionals in the Decision
Hopefully potential cash buyers have the advice of trusted financial professionals. These professionals include a CPA, Financial Advisor, or investment banker/trader. Consulting with professionals is key to making a sound and very important decision.
For instance, a CPA would discuss the tax implications of pulling funds from an investment. A CPA would weigh the benefits of paying cash versus the issue of paying the tax man. A CPA would discuss ability to itemize because of mortgage interest and potential other write-offs. Additionally, there are potential tax implications of taking funds from retirement or other accounts.
Financial advisors or others which handle investments are key as well. Taking funds from an account could conflict with a financial plan. Why? Because it removes a future income stream, it may be bad timing for withdrawing funds, and more. So bring in the experts to discuss options with you and your mortgage loan officer. Although, a savvy buyer with experience handling his/her own money could make the decisions as well. Finally, being a cash buyer still may be your best option, but at least you know an informed decision has been made.
Know Mortgage Options to Keep Your Cash
Obviously getting a mortgage means there will be a mortgage payment (except reverse mortgage purchases). So 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.
If a Veteran is disabled and exempt from the VA funding fee, it makes even more sense to consider. Plus, it doesn’t have to be no down payment. Actually a down payment lowers the costs of a VA loan. VA jumbo loans will even finance over $417,000 and often beats conventional jumbo financing.
Most of the United States is USDA eligible.
Even all of some 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. But funds in a retirement account are ok. So the advantages of a no money down USDA loan are many including it just became the cheapest government loan.
Conventional financing has many options.
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. Maybe 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.
FHA offers the trifecta of low down payment, flexible guidelines, and great rates. So if a buyer uses cash because of a 600’s credit score, FHA could be a better solution. It even works when a buyer has more than the required 3.5% down payment. FHA works for that too.
Commercial 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.
Think of how much your true after-tax effective rate for a mortgage payment would be. 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!
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. There are of course the traditional mortgage options of 10% – 20% down payment. But there are also some creative ways that may work better. The first creative option includes a VA cash out refinance up to 100% of the home 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 payment! The homeowner must continue to pay all property taxes and insurance though. So 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 house 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. Keep in mind that a reverse mortgage does not exempt homeowners from the normal mortgage requirements of keeping the property in good condition, paying taxes and insurance, and others. Ask a reverse mortgage loan officer today.
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 advisors wish the nest egg wasn’t fully spent on a house.
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Buyers looking to qualify, contact one of our loan officers at 910-418-4609.
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