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According to the National Association of Realtors, more than 80% of home buyers finance their purchases with loans to cover a cost. But what happens if you have the ability to pay for a house in cash? Can you do so? Should you?
Buying a house is no easy feat, and there is a lot of red tape that comes with the whole process. They say that cash king, but when houses cost hundreds of thousands of dollars, can you actually buy a home with physical cash? Are there laws that prevent you from doing so? Or is it just plain weird?
In this post, we’ll explain how to purchase a house with cash, if you can, and if this is a good idea in terms of long-term investment.
Yes, You Can Buy a House With Physical Cash. Here’s the Deal.
The short answer is yes; you can buy a house with physical cash. No laws prohibit a cash real estate transaction.
For the record, when people say they buy a house in cash, they mean that they are purchasing a home without using a loan. Of course, you can bring hundreds of thousands of dollars to the closing, but when most houses cost over 300,000 dollars, it’s a bit risky to bring all of that money to the deal.
However, there are benefits to purchasing a house without the use of a loan. For one, doing so will be much more appealing to the seller. If you buy a home in a competitive housing market, offering to pay in cash will most certainly give you a leg up above the other people vying for the same house.
Additionally, when you buy a home outright, you will be unburdened from paying fees like mortgage fees, which can lead to your financial freedom down the line. You also will get to bypass mortgage interest rates and mortgage insurance fees, overall saving you a lot of money. You will also benefit from an overall faster closing deal and pay less in closing fees.
Still, paying for a house in physical cash can come with many downsides. Keep reading on to learn more.
Why You Should Avoid Paying With Physical Cash
For one, bringing suitcases with hundreds of thousands of dollars opens you up to a lot of risks; you could lose the bag of money on your way to the deal, or you could get robbed if someone knows that you are transporting that much cash.
Then, there is the logistical standpoint of who will count the cash. Counting all of that cash will take a lot of time, and many attorneys and agents may be too annoyed (or too freaked out) to work with you.
Secondly, a closing lawyer may have concerns that the cash is counterfeit. Using wire transfer is much safer for the attorneys because they know that the money is legitimate. Counting stacks of bills is much harder to prove that the bills are indeed legitimate.
Thirdly, you will need proof that the transaction happened to begin with so that you don’t get screwed. At a minimum, you will need a receipt, although this is much less guaranteed than, say, if you can trace the sale with the help of your bank.
You also have to keep in mind what the closing attorney wants. Most attorneys will feel uncomfortable transferring large sums of cash to their banks. You also have to keep in mind that banks are closed sometimes, and attorneys won’t want to hang onto a large sum of cash overnight or on the weekend.
If you do want to pay with cash, check first with your attorney to see if they are open to receiving payment that way. If they are, set up a time where you and the attorney are comfortable making the transfer. The last thing you want is to take out the cash, hold it, and transfer it all to have the attorney reject it.
You also must consider that keeping large sums of cash in your house while you wait to give it to the buyer can open you up to many problems. Your house could have a fire, or you could be a victim of a burglary. You open yourself up to many potential problems when you decide to pay cash.
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Alternatives to Buying a House With Physical Cash
There are other ways to purchase a house outright beyond bringing stacks of hundred bills to the realtor. When most people say they are buying a home with “cash,” they mean that they are buying outright and are paying by a wire transfer or cashier’s check.
Both of those options are much safer and still afford you the benefits of buying with physical cash (no mortgage interest rates, faster closing deals, and so forth).
One of the safer ways to purchase a home outright is through a wire transfer. With this method, your bank will set up the process, and the transaction can be traced by both your bank and the seller’s bank. This acts as a hard form of proof of payment – one where you don’t have to worry about keeping track of a paper receipt.
Additionally, most wire transfers go through within a couple of days, so the process will not be slowed down by this method at all.
Another great option is to use a cashier’s check to pay for the home. You can get a cashier’s check from your bank. Alternatively, some home sellers will allow you to write a personal check, but this is less common as sellers prefer the check to come from a bank.
However, if the seller does allow you to use a personal check, you must make sure that you have enough funds in your checking account. You also should let your bank know ahead of time that you plan to transfer such a hefty sum so that they don’t become suspicious that fraud is occurring.
A Low-Interest Rate Mortgage Might Be a Better Investment
Even if you can purchase a home upfront, it may make more sense to finance the house with a low-interest mortgage rate. There are a few reasons for doing so.
For one, it may be better not to tie up all of your cash in one purchase. You never know when you will need this cash in the future, and a low-interest mortgage will give you the financial freedom to keep most of that cash to use at a different time. Most homes need repairs once you move in, and you don’t want to spend all of your money and not have any left in savings to take care of important fixes like a broken water heater or bad plumbing.
Additionally, if you decide to sell in a few years, you will need a sizable sum of money to deposit your new home before selling your current home.
As a result, it may make more financial sense to save some of that money for a future date.
Read More: How To Buy A House
Purchasing a house can come with a lot of questions, especially if you plan to use unorthodox methods like using physical cash to make the purchase. Below are some frequently asked questions that many homebuyers have before purchasing a new home with physical cash.
If I buy a house with cash, do I have to explain where the cash came from?
Legally, you do not need to disclose to the seller where you got the cash. Although, you should keep in mind that you may get some raised eyebrows if you whip out a wad of 100’s of thousands of dollars.
Does the IRS know if you buy a house in cash?
While the IRS may not know immediately when you purchase a house in cash, it’s only a matter of time before they find out. According to a recent law enacted in the 1980s, you must fill out a form called Form 8300 when you make cash transactions greater than $10,000.
This is an electronic form that you can file directly to the Financial Crimes Enforcement Network (or FinCEN). The chances are that if you are purchasing a home with cash, you will undoubtedly exceed the $10,000 threshold, and so this form is mandatory if you plan to buy a home with cash.
Furthermore, it’s in your best financial interest to report the sale as if the IRS finds out that you didn’t report it, you are subject to hefty fees. How hefty? They can charge you up to $500,000 for every single year you kept the transaction hidden.
Also, you will have to disclose the purchase of the real estate property on your tax returns. So be sure to check with a CPA if you have any questions involving the IRS, taxes and your cash purchase.
Do you get a tax break for buying a house with cash?
You’ll lose your mortgage interest deduction when you buy a home using cash. However, the IRS will still permit you to take deductions for your property tax and interest on a home equity line of credit if you qualify.
How does the IRS know if you buy a house?
In most cases, the seller will put your name on their Form 8300. Once they submit their form, the FinCEN will locate your information and pair the seller’s form with the document you also submitted.
Again, you will have to disclose the purchase of the real estate property on your tax returns. So be sure to check with a CPA if you have any questions involving the IRS, taxes and your cash purchase.
Can you buy a house in cash without proof of income?
You can purchase a house without proof of income. If you wish to do this, you can get a no-income verification mortgage (also called a stated-income mortgage). This allows applicants to qualify using non-standard income documentation.
You can also purchase a house with cash without proof of income. Again, no laws prohibit you from buying a home outright with cash. If you have the money to do so upfront, you do not need to prove your source of income.
Though rare, you can indeed purchase a house using cold, hard, physical cash. However, buying a home with cash opens you to a wide variety of problems that you wouldn’t face if you used other methods like a wire transfer or a cashier’s check.
If you decide to pay in cash, make sure you check with the seller first to set up a time and a place to transfer the cash safely. If the seller is uncomfortable with using physical cash, the other methods above will still give you the same outcome of closing the deal quickly and will help set you above your competition.
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