How to Make a Cash Offer With a Mortgage
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Investors and well-heeled buyers used to be the only ones equipped to make cash offers on homes. But now some real estate companies and lenders are giving buyers who need mortgages a chance to compete as if they have cash.
Here's how cash-offer programs work and what to consider before signing up.
What is cash-offer financing?
Cash-offer financing programs debuted in the past several years as the housing market heated up and a growing portion of buyers made cash offers to win bidding wars. Sellers like cash because they don't have to worry about a buyer having financing troubles that could delay — or prevent — the sale.
In February, 28% of buyers paid with cash, according to a survey of real estate agents by the National Association of Realtors. That's up from 22% of recent buyers surveyed by NAR in July 2022 and 13% of buyers surveyed in July 2021.
Traditionally, a buyer gets preapproved for a mortgage and makes an offer on a home. The lender then orders an appraisal and title search and finishes underwriting the mortgage. If all goes as planned, the loan is finalized on the scheduled closing date, and the buyer gets the keys to the house.
With cash-offer programs, you still finance the purchase with a regular mortgage. But the cash-offer company agrees to purchase the home on your behalf before the home loan has closed. You then buy the home back from the company once your mortgage is final. Some programs agree to purchase the home on your behalf only if the loan isn't a done deal by a certain date. Either way, with a cash guarantee, the seller is assured of getting their money on time.
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How cash-offer programs work
Each program works a little differently, but generally these are the steps involved:
Apply and get preapproved for a mortgage with a cash offer or cash-backed offer.
Work with a real estate agent to shop for a home and make a cash or cash-backed offer on a property. If your offer is accepted, some companies will purchase the home on your behalf and then sell it to you once you've gone through the full underwriting process and your mortgage is finalized. Others will purchase the home on your behalf if your mortgage is not finalized by the contracted closing date.
After the sale closes, move into the home. If the company has purchased it on your behalf, you'll rent the home from the company until your mortgage comes through.
Generally, programs require buyers to pay earnest money, which is applied toward the down payment when the mortgage closes. If you change your mind after a company purchases a property on your behalf, you'll forfeit the earnest money, as you typically would if you broke a contract with a seller. Other rules and fees vary, so it's important to read the fine print.
Some companies say the programs can enable buyers to waive financing and appraisal contingencies when making offers. Those are walk-away clauses that let the buyer back out of the deal without losing earnest money if their financing falls through or the home appraisal comes in lower than the offer amount.
Waiving contingencies can make an offer more attractive to sellers, but make sure you understand the risks before doing so. A lender won't loan more money than a home is worth. So if the appraised value comes in lower than the offer amount and the offer doesn't include an appraisal contingency, you would have to renegotiate a lower price with the seller or make up for the difference out of your own pocket.
Work closely with your real estate agent to craft the offer.
Pros and cons of cash-offer programs
With a cash-backed offer, sellers may feel more confident that the sale will go through, which could give you an edge over other buyers.
Some programs can help with buying and selling a home at the same time. You can make a cash offer on a home while waiting for your current property to sell.
You may be able to get into the home more quickly than when buying the traditional way.
You pay fees to use some programs. And because the programs have varying terms and conditions, it will take time to sort through the options — on top of comparison shopping mortgage rates.
With some programs, you have to use their affiliated real estate agents or lenders or pay higher fees if you use your own agent or lender.
A cash offer or cash-backed offer isn't a guarantee that you'll win a bidding war, especially now that cash offers are more common than a few years ago.
Ask these questions before choosing a cash-offer program
How much is the fee? Comparison shop mortgage rates and fees among cash-offer programs and traditional lender mortgage programs.
Which mortgages are eligible, and what are the down payment requirements?
Can you work with any lender and real estate agent? If so, is there a higher fee for doing so?
How much earnest money is required? This is money you'll pay upfront and will be credited toward your down payment when the mortgage closes.
In what situations would you forfeit the earnest money? Read the program's terms and conditions carefully to find out.