All-cash offers and contingencies: what you need to know
Kelly K. | Jul 22, 2021
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By Kelly K. on Jul 14, 2021
You’ve made an exciting decision: you’re ready to begin searching for the home you’ve always dreamed of – covered patio and all.
Whether you’ve just started to explore different neighborhoods, or you’re in the initial stages of budgeting and planning, successfully navigating the homebuying process requires a solid understanding of the costs and expenses you’ll incur along the way. What to expect for closing costs, for example, is an important detail when figuring out how much you can afford to pay for a house.
Closing costs are the fees and expenses you pay, outside of your down payment, to complete the sale of the house.
According to data gathered by The Motley Fool, in 2020, the average closing costs for a house were $5,749. However, this number can vary greatly based on a home’s market value and geographic location. As a homebuyer, you can expect to pay 3%-6% of the home's purchase price on closing costs, but that number can be as low as sub-1% or as high as 4+%, depending on the state.
Increasingly, homebuyers in competitive markets are learning that "cash is king" -- that is to say, buying a house with a cash offer increases your chances of winning when there are multiple offers on a home. Sellers prefer an all-cash deal as it eliminates the uncertainty and slow process of transacting with a traditional mortgage lender. Seriously, high-fives all around!
It’s a common assumption that in order to make an all-cash offer, you have to have hundreds of thousands of dollars already stashed away in your bank account, or a wealthy relative who does and is willing to front you the cash.
However, there’s another option for buyers who aren't high rollers: making an all-cash offer facilitated by an iLender like Accept.inc. The same benefits of a cash offer without the need for upfront liquidity? That’s what we call a win.
Do cash buyers pay closing costs? Yes, if you're making a cash offer on a house facilitated by a mortgage lender, you are still responsible for paying closing costs. In fact, all-cash offers are subject to many of the same closing costs any buyer pays when following the old-fashioned mortgage process.
To delve deeper, here’s a look at the closing costs you'll pay with a cash offer on a house.
Earnest money, also known as a "good faith" deposit, refers to money paid to a seller, accompanied by your offer, to communicate to the sellers that you're serious about following through with the purchase. It's held in escrow until closing.
How much you'll want to put down for your EMD depends on a couple of things. From market demand in the neighborhoods you are considering to the terms outlined in your purchase agreement, you can expect to pay a good faith deposit to be around 2%-5% of the purchase price.
Your real estate agent will be a great resource to help you determine a specific earnest money amount that is appropriate for a competitive offer.
The good news? This amount is not an additional fee but a deposit that is credited towards your down payment at closing.
Title insurance is a one-time fee that serves as a form of protection against any unexpected title issues that may arise while you own the property. On average, title insurance costs about $1,000 per policy.
In addition to procuring insurance, a majority of states require a title search to access public records and verify the seller is the home’s rightful legal owner. A title search, which can cost between $75 and $250 for a single-family home, will also reveal any undiscovered or undisclosed claims on the property, such as liens, wills, outstanding mortgages or deeds – all of which could affect the purchase process.
Homebuyers who use Accept.inc's partner title company will not incur this additional expense -- we pay it for you.
An escrow fee, or closing fee, is generally paid to the title company – an independent third party that handles title transfers, paperwork – like recording the deed – and the distribution of funds involved in the real estate transaction.
Typically, the escrow fee is based on a percentage of the home’s purchase price (rather than a flat cost), but it’ll ultimately vary by company and locale. It can range, on average, anywhere from less than 1% to as high 2%. So, if you’re buying a $250,000 home, for instance, it could cost anywhere from $1,000 to $5,000.
An escrow account, which operates similarly to a savings account, is used to collect and safeguard funds during closing, as well as throughout the lifespan of the loan. In addition to protecting your earnest money deposit, your lender may utilize an escrow account to fund your homeowner’s insurance and annual property taxes.
Property taxes may also be part of your closing costs, even when making a cash offer. Some states charge property taxes in advance – collecting either 6 months or an entire year’s worth of taxes upfront. Because property taxes are often prepaid by the seller, when ownership is transferred, the buyer will be responsible for reimbursing the seller for a prorated portion of the taxes. This number is calculated by dividing the total amount of property taxes paid by the seller by the number of days remaining in the year.
Buyers are typically responsible for paying the entire annual premium for their homeowner’s insurance at closing. The cost of a homeowners policy varies greatly – using factors like coverage amounts, location, the value and size of your home and the deductible to calculate your premium. For instance, your new humble (or not so humble!) abode may be located in an area that requires your policy to include flood or earthquake coverage for added protection against these potential threats.
If you’re purchasing a piece of property located in a community governed by a homeowners association (HOA), you may be responsible for covering a transfer fee. Separate from your yearly dues, the transfer fee exists to compensate the HOA board for recording and distributing the proper paperwork and documents.
An Accept.inc all-cash offer is similar to a traditional mortgage when it comes to private mortgage insurance -- Since you are still receiving a mortgage at the end of the process, if your down payment is less than 20% of the home's purchase price, you'll still pay PMI. The cost, which ranges from 0.5% to 1% of the loan amount, is calculated annually and added to your monthly mortgage payments. Closing costs on cash offers typically include the buyer’s first month’s payment.
All-cash offers provide a smoother, quicker real estate transaction – and they’re highly attractive for sellers, so cash offers are more likely to win a bidding war.
But, let’s face it: most homebuyers don’t have access to the kind of liquidity or money required to fork over the price of the entire house up front. When you're competing with institutional buyers and those with deeper pockets, that feels unfair.
That’s why Accept.inc is here to level the playing field. We believe anyone who qualifies for a mortgage deserves the speed, certainty and competitive advantage that comes with making a cash offer – but with the ability to pay back funds over time like a mortgage. We provide homebuyers just like you with competitive rates and no additional costs (or hidden fees).
Ready to start making strong real estate offers that stand out from the pack? Get Cash Approved™ today!
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