Buy With Cash and Borrow Later
Some buyers wonder if they should stretch themselves and make all-cash offers to get homes in this seller’s market. When cash buying is a necessary strain, there is a solution: buy with cash, and borrow soon after. Delayed financing can make it happen in the right circumstances.
Delayed financing is a special type of cash-out refinance. After paying cash for a home, the buyer uses delayed financing to get some cash back. Then the buyer starts making monthly payments, much like someone who purchased the home with a mortgage in the first place.
Even for those in the position to readily buy with cash, taking a loan out on the house makes financial sense when interests rates are reasonable. Today’s interest rates are indeed a reasonable cost to pay for access to home equity. Plus, interest on home loans are tax deductions.
Not every mortgage company is familiar with delayed financing. Interested buyers need to know what to ask for. Here are the basics.
The Rules of Delayed Financing
First, what can’t you do with delayed financing? You can’t get more money out of the house than the price and costs you paid to acquire it. And you can’t qualify with a FICO® Score under 620, per Fannie Mae’s eligibility standards. Most of these home loans are backed by Fannie Mae. You can’t get delayed financing with a government-backed loan.
Practically speaking, you won’t get all the money out of the house that you spent to buy it. This is because, as with a standard cash-out refinance, there will be a cap on your loan-to-value ratio (“LTV”). As a rule, a conventional lender wants to leave the borrower with a safety buffer of at least 20% of home equity in the home.
For LTV purposes, the value of the home is usually the purchase price (including closing costs and fees), unless the home appraisal indicates a lower property value. Interest rates and fees on delayed financing depend on the lender, the particular loan, and the rates at the time of loan issuance.
Fannie Mae’s Selling Guide lays out other requirements for delayed financing. Key points are:
- The property must be free of already-existing liens.
- The delayed financing loan must be taken out within six months of purchase.
- The home has to have been purchased through an “arm’s-length transaction.” In other words, the buyer has no personal relationship to the seller. The buyer can’t purchase the home from a family member. And the buyer can’t use money from an employer, friend or family member in the purchase of the home.
So, the underwriter will insist that only verified borrower funds went into the home purchase. Unverified deposits could be gift money, and using gift funds is not allowed. So, if a buyer is receiving financial help from a relative to buy the house, it’s not OK to get delayed financing and pay the giver back through that loan money.
The Appeal of Delayed Financing
Delayed financing might be attractive to a real estate purchaser for several reasons. Those who can pay cash for a house might do it to enhance their chances of winning out over other potential bidders, or their ability to negotiate a better price for the house. After a cash purchase, access to delayed financing can enable the buyer to quickly regain liquidity.
Because the buyer purchased the home outright, there’s no requirement to wait six months to let the title “season” in the buyer’s name before the loan money becomes available. (Most buyers purchase through a mortgage, and have to adhere to a six-month waiting period before a cash-out refinance.)
Here are some other reasons a purchaser might want to delay financing:
- If the purchaser is buying a distressed home, a mortgage might have been impossible to secure.
- The purchaser of an investment property could decide to put off financing until the property is ready to bring in income.
- An investor-buyer might decide to tap the equity in this property in order to buy the next property. (Delayed financing can be used for an investment property, a primary residence, or a vacation home.)
- The all-cash buyer might need to regain some cash for rising debts or new goals. For a buyer aiming to do home improvements and increase the property’s value, the delayed financing option can be helpful.
- Getting and paying the delayed refinancing loan can strengthen the homeowner’s credit profile — helping to unlock attractive loans and credit lines in the future.
So far, so good. But every buyer is in a unique position, with a unique set of goals. A tax pro can look at a particular buyer’s situation and explain how delayed financing may or may not be the right product at the time.
Before charting a course, a potential buyer should compare the costs and the interest rates of the various options: getting a regular mortgage, applying for delayed financing, or waiting six months to apply for standard cash-out refinancing. Check and compare the length of the loan, the payments and interest rates, as well as professional fees, loan origination and insurance charges, before deciding on a loan.
Troubleshooting a Delayed Financing Application
As with a regular mortgage, an application for delayed financing depends on an appraisal that roughly measures up to the purchase price.
Sometimes, state-specific rules or lender-specific rules can create additional hurdles. But no matter where the home is located, heavy documentation needs for delayed financing can challenge an applicant.
The underwriter will need the settlement statement from the transaction. All financial account statements representing the cash that went into the purchase must be examined. Documentation must clearly show that the buyer bought the home for cash, independent of any financial support from institutions or from friends, relatives, or business associates.
Are the purchase money sourcing rules a problem? Then the home buyer should wait six months and then apply for a standard cash-out refinance.
In a Nutshell…
Delayed financing is a strategy to consider for any buyer who is keen to make an all-cash offer on a house. But why would the buyer apply for delayed financing rather than take out a regular cash-out refinance loan? Because a regular cash-out refinance can’t be done immediately after the purchase.
A quick financing option that doesn’t require a six-month waiting period is the key advantage of delayed financing over a standard cash-out refinance.
As always, use care when taking out any type of home loan. A home loan results in the recording of a lien on the title, and that always makes foreclosure a potential consequence for a buyer’s default.
Supporting References
Fannie Mae: What Is Required for a Delayed Financing Exception? (May 4, 2022). See also B2-2-01, General Borrower Eligibility Requirements (Sep. 2, 2020), and Standard Eligibility Requirements – Desktop Underwriter Version 11.0 (dated May 26, 2021 and incorporated by reference into the Fannie Mae Selling Guide).
Deeds.com: How to Replace Your Current Mortgage With Cash-Out Refinancing (Feb. 26, 2021).
Kevin Graham for Quicken Loans: What Is Delayed Financing and How Can It Help Cash Buyers Stay Liquid? (Jun. 17, 2021)
Photo credits: Pixabay and Karolina Grabowska, via Pexels.