Why Cash is King

For those in the market to purchase a home, whether you’re a first time home buyer or seasoned investor, you’ll soon come to realize that CASH is the ultimate weapon of choice when making an offer for that home. Sellers are a lot more inclined to work with a buyer who’s bringing all cash to the table because they realize how difficult it really is to qualify for a home loan in this market.

To further explain my point, let’s go over a simple example

Most Banks today (ie: Wells Fargo, Bank of America, Chase) require that borrowers have no more than a 40% debt-to-income ratio

Let’s take an average borrower with about $1,000 in monthly expenses (car loans, student loans, credit cards, etc.)

This borrower decides to apply for a $300,000 loan (a very reasonable amount, especially in southern CA)

The monthly mortgage payment for a 30 year fixed loan would come out to approximately $2,250 (including property taxes & insurance).

This brings the borrower’s total monthly expenses to $3,250 / month ($1,000 + $2,250)

At a 40% debt-to-income ratio, this borrower would need to be making $97,500 or more per year to qualify!

According to President Obama’s pre-election speech, “only 6% of Americans make $97,500 or more per year.” That means that only 6% of Americans could afford a $300,000 mortgage!

In all fairness, there are a lot of dual-income families that can show that kind of income; however, the numbers don’t lie.

I believe that this is one of the best times to buy a house, especially while interest rates still remain at historical lows. Prices have dropped significantly over the last several years and for those of you who have the cash to buy a house, you have a pretty big advantage over many others in the market.