Delayed Financing: An Uncommon Refinance Option

December 21, 2018

 

Paying cash for a house has definite perks. Did you know that paying cash rather than getting a mortgage could help you win a bidding war when buying a new home? You may even be able to negotiate a lower price on the home if you’re paying cash. After all, cash in hand is a sure thing, and a mortgage approval isn’t always a sure thing.

 

On the flip side, though, mortgage interest rates are especially low right now. Data from Freddie Mac shows the average interest rate on a 30-year fixed-rate mortgage in November 2018 was 4.87% with 0.5 prepaid interest points. Prepaid interest points involve paying for some interest up front in order to secure better mortgage rate.

 

Twenty years prior, home buyers were looking at a 6.94% interest rate group with more than a point paid upfront, on average, for the same mortgage product. So why not use a mortgage to buy your house and find another use for your savings? What if you invested that money? What if you had major renovations for your new home in mind?

 

The good news is you can get the best of both worlds with delayed financing: a cash-out refinance option for recent cash buyers.

 

What Is Delayed Financing?

In a delayed financing transaction, you can take cash out on a property immediately in order to cover the purchase price and closing costs for a property you had previously bought with cash. . This allows you to have the advantage of being a cash buyer and giving sellers the chance to know the transaction will close, while giving you the ability to get a mortgage shortly thereafter in order to avoid having all your savings tied up in your house.

 

You can think of delayed financing as a way to give yourself the negotiating advantage that comes along with paying in cash for the home, while still giving yourself the long-term financial flexibility afforded by making monthly payments on a mortgage instead of making yourself “house poor.”

 

How Long Do You Have to Wait to Refinance?

If you’re doing a delayed financing transaction on a property you purchased in the last 6 months, you’re allowed to take cash out immediately without any waiting period.

 

Under normal circumstances, if you bought a home with a mortgage instead of cash, you have to be on the title at least 6 months before you can take cash out and refinance your home, so delayed financing is a notable exception.

 

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When Would You Use Delayed Financing?

So now that you understand what delayed financing is, you might wonder why you would choose it over more common financing options like getting a mortgage upfront and sticking with it or doing a cash-out refinance down the road.

Well, aside from being able to take cash out on the home without waiting for seasoning, here are some other reasons it might be a good option. Let’s briefly go over the pros and cons.

 

Pros:

  • A mortgage might not be feasible at the time of purchase. Trying to buy foreclosures and short sales can complicate the mortgage process and sometimes make it harder to get approved for financing.

  • When buying an investment property, you may not want to pay on a mortgage until it’s time to rent out the property. Once you’re ready to buy another property, delayed financing can free up the cash you spent on the first investment property, so you can buy another one or use the cash in some other way.

  • You might accrue unexpected debt after buying a home with cash, or you might just need more liquid assets. Either of these scenarios would be difficult to resolve if you spent all your cash on the purchase of a new home, but delayed financing can help with that.

  • You might be a real estate investor who needs to ease your tax burden. If you buy and sell homes a lot, you might want to consult a tax advisor to see how delayed financing can benefit you. As an example, you can often deduct mortgage interest from your taxes.

Cons:

  • You need lots of cash up front in order to buy a home because you won’t be getting the mortgage upfront. This can be a challenge if you don’t have lots of available assets.

  • There’s some additional documentation required to get a loan with delayed financing.In addition to the usual mortgage documentation you would need regarding income, assets and credit, you need a few more items. We’ll get into them below so you can be prepared.

  • This is only offered on conventional and jumbo loans. At minimum, you must have a median FICO® Score of 620 or higher, among other qualifications.

 

Am I Eligible for Delayed Financing?

There are a handful of stipulations that have to be met for you to be eligible for delayed financing:

  • Your new loan amount can’t be higher than the total of what you paid for the home, including the purchase price, closing costs, prepaid fees and points.

  • Your original purchase had to have been what’s called an “arm’s length transaction.” That means you can’t be related to or have a personal relationship with the seller. For example, you can’t buy a house with cash from your parents, your boss or your friend and then get delayed financing on it.

  • You need to provide proof that you paid in cash, like your Closing Disclosure, settlement documents or recorded trustee’s deed showing that no mortgage was used to obtain the property.

  • You have to share documentation of the source of the funds you used to purchase the house.

    • If you use savings earned from your employment income or an unsecured loan like a personal loan, you’d need to share the documentation of those transactions.

    • If you have a loan secured by an asset other than the new property (a home equity line of credit, or HELOC, on another home), you’d need to show that the cash you took out was used to pay off or pay down the mortgage on that other property and not to pay for the purchase of the new home.

  • If you were given gift funds for the cash purchase of your new property, you can’t reimburse the donor with the proceeds you’ll get from delayed financing.

 

Keep in mind that all of these requirements may vary depending on the type of loan product you’re looking for and what lender you’re working with.

 

Why Might My Delayed Financing Fall Through?

There are a lot of requirements and, as you can imagine, sometimes things don’t work out perfectly and your financing ends up falling through. There are two main reasons delayed financing loans fail to close:

  1. Documentation issues: There are a lot of documentation requirements for delayed financing. If you don’t have everything you need, you’ll need to wait at least 6 months from the date you purchased the property to complete a typical cash-out refinance.

  2. Appraisal issues: The house is appraised when you buy it. When you’re starting your delayed financing loan, it will have to be appraised again. If the house appraises for lower than the price you paid for it, you’ll have to figure out a different financing option or absorb the difference.

If you’re interested in delayed financing, it’s definitely something to learn more about and consider. Paying in cash may help you out. Just be certain that you’re meeting all the requirements for delayed financing if you plan on doing this.

 

Do you think you might be eligible for delayed financing now? Fill out some basic information or talk to one of our Home Loan Experts at (866) 617-7381 to get started!

 

 

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