How To Buy A Cash-Only Home With A Loan

Reading Time: 4 minutes

You see a listing that you love and think it’s the best investment, but it says cash only. This means the seller isn’t accepting financing and there’s probably a good reason for it. If the home won’t pass the lender’s requirements, buyers won’t be able to secure financing, leaving the seller with an unsold home.

You might think if you don’t have the cash you can’t buy the home. But there’s an alternative. 

A hard money loan is as good as cash in most sellers’ eyes because it’s not traditional mortgage financing and it doesn’t require a certain value for the home to pass underwriting. Hard money loans help millions of investors create or expand their real estate portfolio. 

Here’s how it works.

What Is A Hard Money Loan?

A hard money loan is a short-term loan from private investors. A hard money loan focuses on the property (collateral) not the borrower. Since hard money loans are non-bank funds, sellers often accept a hard money loan for a cash-only home.

The largest difference and the key to why sellers accept hard money loans is hard money loans focus on the property’s after repaired value versus today’s value. Banks look only at today’s value and if the home is in disrepair, it probably won’t meet the value necessary to buy the home, which leads to mortgage denial.

A hard money loan uses all information including the potential renovations you’d make on the home to come up with your loan amount. Investors focus on the property’s future value after you make the renovations and make a profit – that’s where the money is and is why hard money lenders help investors buy distressed homes.

You’ll Need A Down Payment

When you buy a cash-only property with a hard money loan you will need a down payment. You may even need as much as 30%+, it depends on the situation. So it’s not like you aren’t putting any money down on the home – you’re paying partly in cash and the rest with money borrowed from a hard money loan.

Hard Money Loans Close Fast

Here’s the best part – hard money loans close fast because they don’t have the in-depth underwriting process traditional mortgage loans require. Here’s why.

Hard money loans don’t focus on the borrower’s credit score or income. The focus is on the collateral – the house. As long as investors know the home’s current value and the after repaired value based on input from a licensed appraiser, the loan can usually close in as little as one week.

This is as close to cash-only as a seller can get in most cases. With a traditional mortgage, buyers need 30 – 45 days to close the loan and oftentimes lenders ask for extensions because they can’t get the loan underwritten in time because of all the factors they must evaluate to approve the loan.

What You Must Know Before Applying

Before you buy a cash-only property, make sure you’re aware of the following:

  • The home is likely in a state of disrepair. Sellers list properties as cash-only when they know lenders won’t approve financing on them. Sellers are either in financial distress and want out of the property or just don’t want to take the time or spend the money to fix it up.
  • Most sellers want to sell the home fast. When a home is listed as cash-only, it usually means the seller wants a short escrow period – usually 14 days or less. They want to get out of the financial burden of the home and move on with their lives.
  • You must have a plan to fix up the home. To get a hard money loan, you must prove you will earn a profit on the home. Hard money lenders don’t care about the home’s current condition, but they do care about how and when you’ll fix it up and sell it for a profit.
  • Hard money loans are short-term loans. You won’t get a 30-year term like you would a standard mortgage. Hard money loans have only a couple year terms, and most investors pay it off within a few months after they fix the home up and sell it for a profit.

The Best Way To Fund A Cash-only Home

A hard money loan is the best way to fund cash-only homes because you don’t have to worry about typing up your cash and having no liquidity.

You put some money down (usually around 30%), and keep the rest of your cash liquid, which is important for investors in case any emergencies occur. The rest of the funds come from your hard money loan. You use the funds to buy and renovate the property.

When you sell the property (flip it) for a profit, you pay off the hard money loan and keep the proceeds. You then have more money to turn around and do it again – using the proceeds to put money down on another home and borrow the funds to buy and fix the home from a hard money loan.

A hard money loan gives you more liquidity and opens up more possibilities to grow your real estate investment portfolio without draining your reserves.

The Bottom Line

If you’re looking at a cash-only home as an investment property, consider a hard money loan. You don’t need 100% of the funds upfront and can buy the cash-only home, meeting the seller’s demands.

You’ll free up your capital and be able to renovate the home and create a profitable real estate portfolio. Like any home, do your research and make sure the area will support the value you hope to get out of the home after renovating it. When it’s done and you sell the home, you pay the hard money loan off and enjoy the proceeds of your investment.