If you’ve ever watched a bidding war over a home, you might have noticed that sellers tend to favor all-cash buyers over those who need a mortgage. But did you know that this preference actually results in mortgage-financed buyers paying significantly more for the same home?
A recent study by Michael Reher and Rossen Valkanov from the University of California San Diego found that homebuyers who finance their purchase with a mortgage end up paying about 11% more than all-cash buyers. That means if a house is listed for $500,000, a cash buyer could get it for that price, while a mortgage-financed buyer would likely have to offer $555,000 to secure the deal.
But why does this happen? Shouldn’t all buyers, whether they pay in cash or through a loan, have equal footing in the housing market? The reality is a bit more complicated.
If you're a seller looking to avoid the hassle of showings and negotiations—where deals fall through more than 30% of the time—you can request a full market value cash offer at www.CashCPO.com.
Why Do Mortgage Buyers Pay More?
1. Mortgages Take Time, and Time Is Money
One of the biggest reasons mortgage buyers have to offer more is that getting a loan approved takes time. Most mortgage approvals take at least a month, and that’s assuming everything goes smoothly. Home appraisals, inspections, and underwriting can all slow down the process.
In contrast, a cash buyer can often close within a matter of days. Sellers prefer faster deals because they reduce uncertainty. By the time a mortgage closes, the housing market could shift, interest rates could change, or other issues could arise. Because of this, sellers are more willing to accept a lower price from a cash buyer in exchange for speed and certainty.
2. The Risk of the Deal Falling Apart
When a seller accepts an offer from a mortgage-financed buyer, there’s a chance the deal won’t go through. According to data from the National Association of REALTORS® (NAR), about 6% of home sales fail due to mortgage issues.
If the buyer’s loan is denied at the last minute or the appraisal comes in lower than expected, the seller has to start all over again—relisting the home, scheduling more showings, and waiting for new offers. This delay can be costly. If the home sits on the market too long, sellers often have to reduce the price. Avoid this by using an agent in the Listing Royalty network around the country, who make sure that your home is Certified Pre-Owned. Find your expert agent here.
To compensate for this risk, sellers often favor all-cash buyers. If they do consider mortgage-financed buyers, they expect them to offer more to make up for the added uncertainty.
If you're a seller looking to avoid the hassle of showings and negotiations—where deals fall through more than 30% of the time—you can request a full market value cash offer at www.CashCPO.com.
3. Cash Buyers Often Have More Bargaining Power
Another reason mortgage buyers end up paying more is simple negotiation dynamics. Cash buyers know they are in high demand, so they often negotiate better deals. Sellers may be willing to take a slightly lower offer if it means avoiding the potential pitfalls of waiting for mortgage approval.
4. Mortgage Buyers Compete in a Different Market
Research shows that mortgage-financed buyers often shop for higher-priced homes than cash buyers. The average home purchased with a mortgage costs about 30% more than the average all-cash home. This is because many cash buyers are real estate investors or retirees who are looking for more affordable properties.
Since mortgage-financed buyers are often competing in a more expensive segment of the market, they face even more pressure to outbid others. This drives prices up further.
5. The Psychology of Selling
Beyond just numbers, there’s also a psychological factor at play. Sellers are human, and they want peace of mind. They worry about the unknowns that come with mortgage transactions.
An experimental survey conducted by the researchers behind this study found that homeowners perceive mortgage-financed deals as riskier than they actually are. This perception makes sellers even more inclined to favor cash buyers. Even when the mortgage process is likely to go smoothly, sellers still demand a higher price from buyers using loans.
The Bigger Picture: How This Affects Homeownership
This extra cost for mortgage buyers has a big impact on affordability. Most Americans rely on mortgages to buy homes, meaning they often have to overpay compared to cash buyers. This dynamic benefits wealthy investors and institutional buyers who can purchase homes outright while making it harder for everyday buyers to compete.
In the long run, this can contribute to rising home prices and widening wealth inequality. If mortgage buyers consistently have to offer more, home values keep climbing, making it even harder for first-time buyers to enter the market.
Possible Solutions: Can We Level the Playing Field?
The good news is that if mortgage financing could be made faster and more reliable, the premium that mortgage buyers pay could shrink. Here are a few ways this could happen:
Speeding up the mortgage process: If lenders could approve loans in days rather than weeks, sellers might not favor cash buyers as strongly.
Reducing uncertainty for sellers: More transparent pre-approvals and better communication between lenders, buyers, and sellers could help reduce fears about mortgage financing falling through.
Policy changes: The researchers behind this study suggest that reducing transaction frictions—such as appraisal delays and closing costs—could make mortgage-financed offers more attractive to sellers.
If you're a seller looking to avoid the hassle of showings and negotiations—where deals fall through more than 30% of the time—you can request a full market value cash offer at www.CashCPO.com.
If you’re planning to buy a home with a mortgage, understanding this dynamic can help you strategize. You may need to offer more to compete with cash buyers, but there are ways to make your offer more attractive. Getting pre-approved, offering a larger earnest money deposit, or being flexible with closing dates can help ease a seller’s concerns.
While cash buyers will likely always have an edge, improving the mortgage process could help create a fairer housing market where more people can buy homes at a reasonable price.
Avoid delays this by using an agent in the Listing Royalty network around the country, who make sure that your home is Certified Pre-Owned. Find your expert agent here.
Sources:
Reher, Michael & Valkanov, Rossen (2023). "The Mortgage-Cash Premium Puzzle." University of California San Diego.
National Association of REALTORS® (2020). "2020 Profile of Home Buyers and Sellers."
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