Buying a home with cash is not easy, but sometimes it is the better option. If you have income documentation issues, you might not be able to secure a mortgage approval. If this is the case for you, planning to be a cash buyer may be your own choice for home ownership. Here are the top reasons paying cash is the better option.
Self-Employment Income is Hard to Verify
Self-employment has its benefits and drawbacks. You work for yourself and don’t have to answer to anyone, which is probably a benefit for you. On the flip side, though, your income is hard to verify. The lender will make you jump through hoops in order to qualify for a mortgage. You cannot just supply your tax returns and assume you can secure an approval. The lender goes through various steps including ordering your tax transcripts from the IRS; figuring out your business expenses, and looking at your tax write-offs. In addition, if you claim a business loss, you essentially don’t have any verifiable income for a mortgage approval.
In this case, using cash to purchase a home may be your better option. This way you don’t have to answer to a bank. You don’t have to verify where your money came from or how many expenses you claimed on your tax returns. You can be self-employed for as little or as long as you desire – no one will care. This takes the stress out of the mortgage approval and tax planning for the years preceding your home purchase.
Fluctuating Income Hurts Your Purchasing Power
If your income fluctuates throughout the year, obtaining a mortgage approval may prove to be difficult. Lenders want to see a steady stream of income. If you work on commission or in a seasonal job, your income is likely less than steady. Most lenders will take an average of your income over a period of 2 years. This helps them even out the peaks and valleys your income experiences. For example, if your peak season is January through March and then your income decreases dramatically from March through December, you only have about 3 months of great income. When the lender takes an average over 24 months, they figure out how much money you can afford in a loan based on the lower income.
The lower income figure obviously decreases the amount of home you can purchase. If you make enough money during your peak period that you can stock it away to become a cash buyer, you will have more purchasing power. Because there are not any banks involved when you pay cash for a home, you do not have to prove your income or the origin of your funds. This may allow you to purchase a more expensive home than you would qualify for with mortgage financing.
High Stated Income Loan Rates Makes Being a Cash Buyer Attractive
There are still select lenders who offer stated income loans. They may not call them stated income – they may call them “alternative documentation loans.” This means you provide your bank statements instead of tax returns for proof of income. This helps borrowers who have a smaller bottom line on their tax returns that would leave them without a mortgage approval. The problem, however, is the interest rates these lenders charge. Alternative documentation loans typically come from private lenders. This means lenders who keep the loans on their own portfolio. This allows them to charge any interest rate and/or fees. They do not have to follow the Qualified Mortgage Rules because the loan will not go to the secondary market.
In most cases, the interest rates are rather high. If you don’t want to pay the higher interest rates, you may consider being a cash buyer. While you will have to put up a large amount of cash up front, the overall purchase will cost you less. With high-interest rates and/or fees, you could add hundreds of thousands of dollars to the amount you pay for a home. Sometimes waiting until you have the cash to purchase the home outright is the better option.
Choosing to be a cash buyer means you are in control. You don’t have to verify your income or negotiate fees/rates with anyone. You determine how much home you can afford by the amount of cash you have on hand. All you have to prove to the seller is that you have the funds available for the amount of the offer you provide. This takes the stress off you if your income is not straightforward. Unless you have income reported on a W-2 or your tax returns are very simple with very few write-offs, this may be your better option.
Choosing to pay cash requires plenty of time for planning, though. It could take many years to save up for the home you wish to purchase. Consider all of your options when determining if you want to be a cash buyer or try to apply for a mortgage. There are many mortgage programs out there today, making it easier to secure financing than before. Don’t just apply with the big lenders who offer conforming loans. Try private lenders as well; they offer their own programs because they keep the loans on their own books. This means they call the shots and may even be able to take a chance on someone with self-employed or fluctuating income.