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Hot housing markets and homebuyer frustration over competing with cash buyers has spawned a new kind of finance company—cash offer financing. You can work with a cash offer financing company to make a cash offer on the home of your dreams and repay the company over time like you would with a loan. Here's a rundown on how it works and what you need to know.
How Does Cash Offer Financing Work?
Details differ somewhat by company, but the steps in cash offer financing typically follow the same basic sequence:
- Mortgage preapproval: Some companies check your credit scores and credit reports and verify your income and employment status to complete preapproval themselves. Others ask you to provide a preapproval letter from a lender of your choosing, and then verify the details with the lender's loan officer. Based on your finances, the cash offer finance company tells you how much it is willing to give the seller as a cash offer.
- Purchase offer: Working with a buyer's agent—either someone you choose or someone chosen by the cash offer provider—identify the home you want and submit your bid in the form of an all-cash offer. Purchase offers typically include an earnest-money deposit that you put down in cash. Some or all of this cash may eventually be taken as a fee by the cash offer financing company.
- Cash sale: Following a home inspection, appraisal and your signing of a contract pledging to buy the home at the agreed-upon price, the cash offer financing company makes a cash purchase, sometimes closing within one week of the seller accepting your offer. The financing company takes ownership of the home (or, in the case of at least one company, issues you a short-term "bridge loan" you can refinance with a mortgage) and you can move in right away.
- Buyback: You work with your lender (which may or may not also be the cash offer financing company) to finalize your mortgage loan, and then use it to buy the home. Some cash offer financers charge you daily rent, based on local rates, from the date they purchase the home until they finalize the sale to you. If financing isn't approved (an unlikely scenario unless circumstances have changed since your preapproval), you'll likely be on the hook for at least a portion of your convenience fee or good-faith deposit, per terms spelled out in your cash offer financing contract.
What Does Cash Offer Financing Cost?
Companies providing cash offer financing make their money in a variety of ways, including various combinations of the following:
- Convenience fees: A charge of anywhere from 1% to 5% of the home purchase price may be charged upfront.
- Agent's fee: Some cash offer financing companies cut deals to share the buyer's commission on the sale with your agent.
- Mortgage servicing costs: Some cash offer financing companies are also mortgage lenders and, if you secure a mortgage through them, collect origination fees when you close on the loan.
- Interest charges: Cash offer finance companies that issue mortgages or bridge loans collect interest on your loan payments.
- Rent: The financing company may charge you daily rent (based on local market rates) in the time between its purchase of the home from the seller and its sale to you. An invoice for the rent is presented at closing and may be paid out of pocket or deducted from your earnest money.
Details of these costs are included in contracts you must sign before the cash offer company can make an offer. Make sure you read them carefully before signing, and consider having an attorney or real estate professional review them to help ensure you know what you're getting into.
Pros and Cons
Cash offer financing has its benefits and drawbacks. Here are some to consider if you're thinking about buying a home this way.
Pros
- Levels the playing field with other cash buyers: Cash purchases have become a major factor in the U.S. housing market, with 23% of all sales of pre-existing homes nationwide selling for cash in December 2021, according to the National Association of Realtors. Competing with cash offers can be difficult for many home buyers, and cash offer financing can give you a leg up.
- Negotiating leverage: Cash offer finance companies claim that the certainty of a cash offer makes sellers more willing to accept it over higher bids that are contingent on final mortgage approval. The companies also say some sellers may be more amenable to making repairs or even lowering their sale price for a cash buyer in the event an inspection uncovers issues that need attention.
- Quick closing: Closing on a cash sale can be arranged much more rapidly than one that requires approval of a loan application. There are fewer papers to pass, and if there are no issues raised by a home inspection, a closing can happen within days instead of weeks. That means the seller gets paid more quickly, and you get access to the home sooner.
- Potentially less frustration: There's no way to measure the disappointment of losing out on a purchase offer because the seller took a cash bid instead of yours. While no one can say for certain that using cash offer financing will spare you heartache, it could give you a helpful advantage in highly competitive housing markets.
Cons
- Fewer options: Some cash-only financing companies require you to use their agents when shopping for a home, and some that serve as lenders either require you to get your mortgage through them or charge significantly higher fees if you use another lender.
- Expense: Convenience fees and rent payments are costs you won't have if you shop for a home with a conventional loan preapproval letter. There's no way to verify without applying for a loan, but some cash offer financing companies that double as lenders claim to provide mortgage rates and fees that are comparable to what you'd pay any other lender, so that you essentially get their cash offer services for free. But even if that's true, you still run the risk of paying additional fees if your final mortgage application isn't approved.
- Limited availability: Many cash offer financing companies are relatively new and operate in relatively few markets. They may not be available where you live, or where you hope to buy a home.
Does Cash Offer Financing Affect Your Credit?
Completion of a cash offer financing deal requires mortgage preapproval and a formal mortgage application, both of which entail credit checks known as hard inquiries that are recorded on your credit reports and typically cause a small drop in your credit scores. You could expect a similar result if you obtained a preapproval letter from a mortgage lender and made a standard offer contingent on final mortgage approval. Credit scores can rebound from these dips after just a few months as long as you keep current on your debt payments.
The Bottom Line
If you're seeking a home in a hot housing market and are concerned about a cash buyer beating you in a bidding war, cash-offer financing could be a good option for you. Ask a real estate professional if they're familiar with companies providing that service in your area, and make sure you understand all fees and obligations before you move forward. If cash offer financing isn't available in your market, or if you're not ready to take the plunge yet, consider adopting other tactics to compete with all-cash buyers.
Buying a home these days can be a highly competitive venture, so be sure to bring your A game. Before starting the process, it's important to make sure your credit is in great shape. Experian provides free access to your credit report and credit scores so you can get an idea of where your credit stands. With Experian CreditWorks℠ Premium, you can view the same credit scores mortgage lenders use.