There has always been a debate over Cash offer versus Financing while closing a deal or a transaction in the process of home buying and selling. What to choose between these two processes has always been subjective and pertains to an individual's financial status. Here are basic differences between Cash v/s Financing for a clear cut choice one can make before involving yourself in the prowess of the real-estate arena.

First, What is a Cash Offer?

In simple language, by its name itself, a cash offer is the process where all the transactions and deals are made in cash between buyer and seller. It means no process of mortgage loans involved whatsoever from the beginning of the payment of deposits to the closing of the deal.

A seller always expects to receive cash in exchange for his/her property from the prospect buyer rather than getting involved with financial contingencies or the mortgage loan process.
Seller always hopes for a buyer who is financially capable or who has sufficient funds to buy the property because transactions done in all-cash negates delays related to any housing loan or any other finance fortuity.

Transactions in cash offer the possibility of closing the deal quickly which is why many sellers even settle down the deal to cash offers lower than listing price. Because the contract binds both the parties- seller and buyer, it is always smart to decide and have a clear cut conversation about the transaction first, as one party cannot change the contract without either one’s consent. That’s why when the seller finds out that the buyer needs financing, sellers are most of the time not willing to change the terms of the contract.

Sometimes what happens is when the buyer changes cash offer into mortgage contingency, the seller may refuse the whole offer and keep the buyer's deposit because of the breach of contract and move onto another buyer at a different, much higher price. This happens when buyers think that no one will notice the material change but due to digital and institutional sellers these days, the rules for transactions are transparent and rigid. In many cases, buyers have lost their deposit, payment for appraisals and inspection, and eventually lost the deal of property because they couldn’t agree to the seller’s preferred payment.

What’s the next option then? The answer is Financing.

On the one hand, a cash offer is only suitable to buyer’s with sufficient funds whereas, on the other hand, a buyer who cannot pay cash has several financing options such as;
1. Government loan
2. Conventional loan
3. Private money loan
4. And hard money loan

❏ Government-insured loans out of four options have significant limitations and rules. In the case of Nepal, Nepal Rastra Bank being the central bank of Nepal has a key role in the regulation of real-estate financing. These are the major directives issued by Nepal Rastra Bank in the real-estate sector;
● Loan against the collaterals of real estate or housing/land should not exceed 60% of the fair market value of the collateral

● No banks and financial institutions should exceed 25% and 40% of total loans on real estate and real estate and residential housing loans respectively

● The real estate loans and real estate and residential housing loans should be brought down to the following proportion of total loan within the stipulated time frame: Real Estate Loan: 15% by the end of FY 2068 and 10% by the end of FY 2069 Real Estate Loan and Residential Housing loan: 30% by the end of FY 2068 and 25% by the end of FY 2069

● Borrowers can restructure/reschedule the real estate loan for up to one year if they have paid 25% of the principal and interest. • If the real estate/residential and housing loans are not brought within the limit in the stipulated time, the amount exceeded should be given the risk weight of 150%.

● Residential loan against the house/land should not exceed the two-third of the fair market value of the collateral

● Reclassification of real estate loan into 1) residential housing loan, 2) commercial complex and residential apartment construction, 3) trading complex already built 22 and which have begun earning and 4) other real estate loans.

● The real estate loans should be brought down to the following proportion of total loan within the stipulated time frame: Total of categories 1), 2) and 3): 30% and 25% by the end of FY 2068 and FY 2069 respectively Other Real Estate Loan: 15% and 10% by the end of FY 2068 and FY 2069 respectively. Totals of 1), 2), 3) and 4): 30% and 25% by the end of FY 2068 and FY 2069 respectively. Directive 21/067/68, Amendment 2067/12/04 (18-03-2010)

● Borrowers can restructure/reschedule the real estate loan for up to one year only if they have paid due interest.
● Relaxation of real estate loan definition so that the personal home loan of less than Rs 6 million may not be included in the real estate loan. The home loan can be provided by only one bank or financial institutions to one family only once
Source: www.nrb.org.np

❏ A conventional loan is related to different commercial banks, development banks, and financial institutions. Different banks have different schemes catering to housing loans based on their foundation. Generally, conventional loans come with competitive interest rates, extended loan tenures, and other flexible features. According to a 2016 report, banks and financial institutions (BFIs) have come up with easy home loan schemes. BFIs are now offering home loans as low as 6.49 percent interest rate. Various banks have already introduced schemes for house and land purchases.

Some of the banks of Nepal like NIC Asia offered the lowest home loan interest rates at 6.49 percent which was valid for a limited period. NMB Bank has its ‘Saral Ghar karja yojana’ starting at a 6.66 percent interest rate with a maximum repayment tenure of 25 years. Machhapuchhre Bank is offering a home loan scheme at 7.5 percent. People in the regular income group who can repay the debt are eligible to apply for the conventional loan. The minimum amount that the bank credits is Rs 500,000 up to Rs 10 million as per the valuation of the property. Interest rates are based on the floating market and subject to change.

Bankers assume that the interest rate will not change at least for the fiscal so the buyer’s looking for a conventional loan should be updated with the interest rate banks are offering and go for what works out best for them keeping their financial status in mind.

❏ A Hard Money loan is the most flexible option of financing out of all these options as the money is lent from an individual or company and not a bank. It is also known as the “last resort” or “short-term bridge loans”. A hard money loan relies on collateral rather than the financial position of an applicant. The funding time frame for this is short. Collateral for this sort of loan is usually property and there is room for negotiation between the borrower and lender. The higher cost of a hard money loan is offset by the fact that the borrower intends to pay off the loan relatively quickly—most hard money loans are for one to three years—and some of the other advantages they offer.

❏ A private Loan is another financing option that is signed and accepted under the three “C”s of financing - Collateral, Credit, and capacity for repaying. The lender will examine first the affordability of the borrower and run a fact- check if the borrower can pay the loan in time. Private lenders prefer paid interest and negate foreclose on the collateral property. Out of all the options mentioned above Private loan is the quickest but also the most expensive financing option.

In conclusion, a buyer has all these options available in short of cash but various factors such as credit score and home appraisal may cause the bank to reject the loan application. These factors make a financed offer usually less attractive to the seller, as compared to a cash offer. If you decide to purchase a house with a loan, make sure you can easily afford the principal and interest payments each month. If you decide to go with cash, make sure you'll still have enough to cover ongoing costs like property taxes, homeowners insurance, renovation fees, and other fees each month.