Hi there, today we’re going to talk about the difference between cash offers vs. traditional offers that are made with loans from a bank or other large lending institution. What’s the difference?
The majority of home purchases are made using a loan, a very common scenario for this is for a buyer to put down a 20% down payment and then get a loan for the other 80% of the purchase price. So for simplicity’s sake, if you had a home that cost $100,000, the buyer brings in a down payment of $20,000, and gets a loan from a bank for $80,000 for the difference. This is still a common scenario for a buyer getting a conventional loan, but there are also other popular loan types that have lower down payment requirements.
An FHA loan which is insured by the Federal Housing Administration requires only a 3.5% down payment, but must be used by an owner occupant who is buying the home as their primary residence. Another type of loan is a VA loan which is a special loan created for veterans and has a zero down payment requirement but again must only be used for a borrower’s primary residence.
All of these loans generally involve a bank or large lending institution that is putting out the money and they have a list of requirements the borrower must satisfy before the loan is funded. These might include income and expense documentation for the borrower, a minimum credit score and credit history, as well as a number of requirements for the property being purchased.
For these loans a property must have an appraisal completed which often has to match or exceed the amount of the purchase price and the house has to be in overall decent condition before a loan can be funded – for example any potential health and safety issues may need to be fixed or other repairs may also be required by a lender prior to funding the loan.
Borrowers often get lists of conditions that the lender requires right up to the point of funding, and any key missing piece of documentation (such as a change in a paycheck amount or a new late payment showing up on a credit report) or issue with the property itself can prevent funding and cause delays or cancellations for transactions.
Cash offers, like the kind you receive from house buying companies are a bit different. Even though it has the word “cash” in it, it does not mean you will receive an actual briefcase full of cash for the purchase of a home. Real estate transactions almost always involve title insurance and escrow companies and the funds for the transactions are usually sent via bank wire transfers. In this case it just means the buyer already has all the funds available to purchase the home without the need to borrow funds from a bank.
The term “Cash Offer” is also commonly used to describe an offer that uses some kind of non-traditional financing, it could be money from private individuals or companies, or what is commonly known as a hard money loan, which is a type of loan that is often used by investors. These loans are generally based on the property value alone, and do not have the same kind of strict documentation and credit requirements from the borrower like a regular loan would. These loans also are made regardless of the property condition, and may or may not require an appraisal but do not require repairs to the property before funding.
The timeline for cash offers is much faster than that of a traditional offer. Traditional offers using bank loans often take 30-60 days to be able to go through all the requirements and close. Whereas a cash offer may be able to close in as little as 7 days or less, even if it involves some kind of private or hard money financing.
If you need to sell your home fast, cash offers or cash equivalent offers are the way to go. Here at Bright Idea House Buyers, we use a combination of cash and private money financing for most of our purchases. This allows us to be able to purchase your home quickly, regardless of the condition or any repairs that are needed.
So the next time you see the term cash offer, conventional or FHA loan or otherwise hopefully you will have a little more understanding about what this means. If you have a house you need to sell in Southern California and want to see if we could give you a cash offer for that property – just click on the link below and head to our website at brightideahousebuyers.com or give us a call at 424-625-7026 and we’d be happy to give you a free consultation to see if we can help you out. Thanks.