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You’ll have a much easier time making a successful offer on a house if you can pay cash.
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You’re a lot more likely to be able to buy a house in a competitive market if you can pay with cash.
If you don’t have the cash on hand quite yet, finding an outside investor is one option.
You can also consider taking a loan from your 401(k), but that comes with some risks to keep in mind.
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In 2020, housing prices skyrocketed and US housing gained $2.5 trillion in value, the most in a single year since 2005. Since then, there’s been a lingering trend of high demand and low supply when it comes to homes on the market. In 2023, even as mortgage rates have climbed up, sellers are receiving multiple offers for their property.
According to an analysis from Redfin, cash offers are four times more likely to win a bidding war. If you’re eager to buy a new house and want to make a cash offer but haven’t sold your current house yet to have the cash on hand, there are ways to do it.
Certified financial planner Taylor Kovar shared three pieces of advice for anyone who wants to make this happen in 2023.
1. Take a loan out of your 401(k)
Kovar says that if you have a 401(k), you can get funds from it. You have two options. You can take a 401(k) loan from your account, which will need to be repaid with interest or you can take a 401(k) withdrawal, which comes with a 10% penalty and income tax from the IRS.
If you decide to take a loan, you’re usually allowed to take up to 50% of your 401(k) vested account balance or $50,000, whichever is less. However, you have to agree to pay back this loan plus interest to your 401(k) provider, usually by five years.
Also, it’s important to note that you typically cannot make 401(k) contributions while you have an outstanding 401(k) loan.
This route comes with some more strings attached. For example, Kovar says that if you get fired or quit your job before the loan is paid off, the entire loan amount is due immediately or else you can incur extra penalties or taxes.
You should also remember that tapping into this money affects your retirement plan.
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2. Get a personal loan from a bank or credit union
Kovar also suggests that if a person has a good relationship with a bank or credit union, they can try to get a personal loan through them and use that cash to buy the home.
“Each bank has their own requirements, like a certain income threshold or credit score, but these personal loans can be quick to get and a great way to bridge the gap until you can round up the rest of your personal funds for the purchase,” he says.
3. Take out a bridge loan
If you own a home right now but want to buy before you sell, Kovar says one route to consider is taking out a bridge loan. These short-term loans are for when a person is waiting for financing to come through, whether from the sale of their house or other circumstances.
“These loans lend you money based on the property you’re buying and not your credit score or income,” Kovar says.
Since these loans are only designed to last a few months, they do come with caveats, Kovar says, such as high interest rates. He recommends doing research before taking one out.
4. Get a home equity line of credit
If you’ve lived in your current home for a long time or have substantial equity in your home, Kovar says that you can get a home equity line of credit. A HELOC is a secured loan where your property is used as collateral.
“This can be a quick and easy solution to get your hands on fast cash to purchase a new home,” he says.
5. Find an investor
If you don’t have have the cash to make an offer on a house, Kovar says that one route you can take is finding a real estate investor who does.
This could work by making the investor a silent partner in your real estate deal so that you can buy the house and they can earn equity on the money they invested over time. When you sell the house, that’s when they can cash out too.
However, Kovar says that this route might not be the easiest one. Most investors are wary of doing this unless you’re someone who has experience in real estate and has bought and sold homes before for profit.
It might be worth looking at your professional network for someone who wants to diversify their portfolio with this type of investment.
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