Can mortgage borrowers compete with cash offers?

About one in four home buyers are making all-cash offers in today’s real estate market.

These cash bids offer sure-fire money and fast closing — both of which can be tempting for eager sellers.

Unfortunately, not everyone can afford to cough up hundreds of thousands in cash upfront. The majority of buyers (especially first-time home buyers) rely on mortgages to finance a home purchase.

But if you’re in this boat, there are still ways to compete — even with the most cash-flush of buyers. Here’s how.

7 Tips to compete with an all-cash offer 

It’s no secret that the housing market is on fire. In fact, according to real estate brokerage Redfin, a whopping three-quarters of buyers face a bidding war these days.

To stand out from the pack, many buyers (25%, actually) are making cash offers.

Offering all cash can definitely catch sellers’ eyes, but there are other ways to sweeten the deal if you’re using a mortgage.

Here are just a few that can help you beat out the competition:

1. Get approved for your mortgage

Getting mortgage pre-approval before you try to make an offer on a house is a must.

Many mortgage lenders offer fully underwritten preapprovals, which means your credit has been checked and your finances verified. It’s basically an “all-clear” for your mortgage loan, except you haven’t found a house just yet.

With these types of preapprovals, you can give sellers confidence. Even with a financing contingency in your contract, they know you’re a safe bet to buy their house and follow through.

2. Waive contingencies

The easier you can make things for the seller, the better. And waiving contingencies? That’s one of the best ways to do that.

This might mean waiving your:

• Financing contingency: Waiving this contingency means you wouldn’t be able to back out of the deal if your mortgage loan falls through
• Inspection contingency: This lets you have the home inspected prior to buying it
• Sale contingency: This one is reserved for existing homeowners and stipulates that you must sell your existing home before following through with the purchase. (It’s also one of the least attractive contingencies for sellers)
• Appraisal contingency: This allows you to back out or renegotiate if your appraisal comes in low

Keep in mind that waiving contingencies is risky.

Waiving the inspection could mean missing underlying issues or repairs on the property, while waiving your appraisal contingency could mean paying lots out of pocket if the home doesn’t appraise high enough.

Make sure you talk to your agent about the risks and rewards of waiving contingencies if you’re considering this.

3. Increase your earnest money deposit

Earnest money is essentially a good faith deposit. It reserves your right to buy the home, and if you back out of your contract without reason, the seller gets to keep it.

If you really want to stand out, increasing your earnest money deposit is a great way to do it. It shows the seller that you’re serious about buying their house and that you’re willing to stake your hard-earned dollars on it.

4. Offer above asking price

Many times, cash buyers come in with lower-than-asking-price offers, largely because of the ease their transactions come with. If you’re up against a cash buyer that’s low-balling the seller, going above and beyond the listing price may be a way to stand out.

You can also think about including an escalation clause, which increases your offer automatically if someone outbids you (up to a certain threshold, of course).

5. Include an appraisal gap guarantee 

In today’s hot market, it’s pretty common for appraisals to come in low. Naturally, this worries sellers (they don’t want you pulling out of the deal if the home’s appraised low). 

To relieve these fears, you might consider adding an appraisal gap guarantee to your offer. This tells the seller you’ll cover any discrepancy between the bid and the appraised value.

This is typically only an option if you have some extra cash saved up outside of your down payment. Covering an appraisal gap would mean paying extra the money you’re putting down with your lender.

6. Get personal

You can also write a personalized offer letter to the sellers detailing what you love about the home and why it’s the perfect fit for your family. Some buyers even include photos of their kids or pets with these.

It’s a nice way to differentiate yourself from other buyers and really pull at sellers’ heartstrings.

7. Consider a cash offer alternative

There are some companies that offer cash-buying solutions that don’t actually require the upfront cash.

Ribbon, for example, lets you pay 1% of the home price (so $2,000 on a $200,000 home) and then backs your offer with cash.

There are other similar options, too, including Accept.inc, Homeward, and more. Big-name brands like Opendoor and Homelight even have cash offer programs as well. 

The bottom line

Cash buyers are a common sight in today’s housing market, but they’re not invincible by any means.

Talk with your agent, get an underwritten preapproval from a mortgage lender, and go into your home search ready to compete. 

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