What Is Delayed Financing And How Can It Help Cash Buyers Stay Liquid?
Paying for a house with cash 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 guaranteed.
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 gives 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.”
Why Take On Debt When Your House Is Paid Off?
While paying off debt and keeping it off is always appealing, mortgage debt is often considered a good debt because, over time, it can increase your wealth.
Low Interest Rates
Mortgage interest rates continue to be at or near historic lows. Today’s mortgage rates are hovering just over 3% for a 30-year fixed-rate mortgage. By contrast, 20 years ago, the best rate you could have gotten would have been just below 7%.
In this low-interest environment, doesn’t it make sense to take the bulk of your cash back, get 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?
It may seem counterintuitive, but having no debt isn’t the key to being a good credit risk. In fact, it’s probably going to hurt you when it’s time to get a loan.
By having mortgage debt and repaying it faithfully and punctually, you’re building a favorable credit history. In the future, when you need a loan, it’ll be available to you, and at the lowest possible rates.
It’s important to note that it will help to have a preexisting credit history with credit cards, personal, student or auto loans prior to getting a mortgage. Your home loan is just one more thing that helps add to your history.
Having a solid history of repaying debt is only one factor that lenders analyze when evaluating your creditworthiness. Another factor they consider is your credit utilization ratio, which is the amount of credit you’re actually using at any given time. Lenders like to see that you know how to manage your credit.
Liquidity, Or Cash On Hand To Invest
If you’re an investor or you want to become one, you know the value of having cash on hand. While mortgage rates are low, and the stock market and real estate investments are offering the potential for high returns, it makes more sense to get your cash back out of your home and use it to build your investment portfolio.
When considering an investment strategy, make sure to evaluate your risk tolerance and balance your portfolio periodically to mitigate risk.
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.
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, there are some other reasons it might be a good option. Let’s briefly go over the pros and cons.
Pros Of Using Delayed Financing
There are lots of reasons why delayed financing might be beneficial to your financial picture and business needs. Let’s take a look at some.
- You may be trying to buy a home in a red-hot real estate market and be forced to offer all cash, even though it took all the cash you had. In some markets – notably (pre-pandemic) San Francisco and New York City, and currently in markets all over the country – buyers are being forced to make all-cash offers to have any hope of getting sellers to accept,even if it leaves them in a tight cash bind.
- 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 impossible to get approved for financing. That’s why liquidity is all-important to real estate investors, and why taking cash paid for a home out through delayed financing is important for the next deal.
- 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 Of Delayed Financing
Let’s review some of the things you’ll need to think about before you decide how to proceed.
- You need lots of cash upfront 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.Conventional loans are backed by Fannie Mae or Freddie Mac and are not FHA, VA or USDA loans, but must comply with some rules for resale, which we’ll discuss below. Jumbo loans are nonconforming because they exceed the maximums allowed for conforming loans.
At minimum, you must have a median FICO® Score of 620 or higher, among other qualifications. The minimum score for a Jumbo Smart loan from Rocket Mortgage® is 680 or better.
What Are Fannie Mae’s Eligibility Requirements For Delayed Financing?
You’ll get the best mortgage rates on conforming loans, or mortgages that are eligible for resale to Fannie Mae or Freddie Mac after origination. If you’re applying for a nonconforming loan, you won’t have to comply with these rules.
In order to qualify for a conforming mortgage through delayed financing, you must comply with their rules. Fannie Mae is the largest purchaser of mortgages by far, so you’ll most likely have to meet its requirements to be eligible for delayed financing. Let’s take a look at those:
- 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 loan or HELOC 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. Speak with a Home Loan Expert for further details.
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 why delayed financing loans fail to close.
There are a lot of documentation requirements for delayed financing. If you don’t have everything you need, you’ll have to wait at least 6 months from the date you purchased the property to complete a typical cash-out refinance.
You may or may not have had the house appraised when you bought it, but a lender will require a home appraisal before your mortgage can be approved. 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.
The Bottom Line: Delayed Financing Can Free Up Your Money For Better Opportunities
Delayed financing helps you take advantage of opportunities by keeping homeowners and real estate investors liquid after the all-cash purchase of property. If you purchased your home with cash and are tired of feeling house poor, talk to one of our mortgage experts about whether you qualify for a delayed financing mortgage. Ready to start your application? We’ll be here to help every step of the way.