What Is Delayed Financing For Cash Deals?
Scott Steinberg5-minute read
February 27, 2022
Paying cash for a new residence is becoming more common. But for home buyers purchasing homes with cash, all their money is effectively tied up in the property itself. For these home buyers, delayed financing can help.
It offers prospective homeowners significant upsides when putting in an offer on a house while still retaining the ability to stretch out payments over a longer period – all without stretching their monthly budget.
Delayed Financing, Defined
Delayed financing is a method for getting a mortgage after you’ve purchased a piece of real estate using cash. Put simply, delayed financing offers a way to purchase a home in which you pay cash upfront, then quickly obtain a cash-out refinance to mortgage the property. Doing so effectively returns a large portion of the money you paid to acquire a home to you, which you then can use for other purposes, like:
- Building your savings
- Making investments
- Paying for renovations
- Paying off high-interest debt
- Purchasing a second home
Under the terms of a delayed financing transaction, you buy a home for cash, then immediately take on a mortgage to reclaim most of the purchase price. This method of financing allows you to both make a more attractive all-cash offer to home sellers (giving them the confidence that a transaction will close), then put money right back in your pocket.
Delayed financing allows you to use a cash-out refinance to obtain a mortgage and enjoy the flexibility of making long-term payments over a period of time, so you can avoid tying up all your savings in the home.
Cash buyers can see benefits immediately. If you’re seeking to obtain delayed financing on a property purchased with cash in the last 6 months, you can take out cash right away without waiting.
However, if you buy a home using a mortgage instead of paying with cash, your name needs to be on the property’s title for a minimum of 6 months before you can take out cash and refinance your home.
This is why buying properties with cash is so helpful for investors. Delayed financing is an important tool in real estate investors’ arsenal. Just over one-third of all home purchases are now all-cash deals, as these transactions help keep investors more liquid so that they can buy more properties.
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Who Is An All-Cash Buyer?
No financing is utilized to facilitate the purchase when buying a house with cash. Under the terms of an all-cash deal, buyers pay out of pocket for properties that they’re seeking to acquire. All-cash purchases can happen in a variety of circumstances.
Some buyers are interested in purchasing properties that are currently uninhabitable or in need of extensive work, with an eye toward rehabbing them either to live in themselves or rent out at a profit. These individuals are known as rehabbers.
Note that lenders may not offer a mortgage on an uninhabitable home, no matter its potential, making rehabbers among the most frequent cash buyers.
Individuals whose children are grown and moved out may wish to downsize, start a new phase of life in a new residence or seek out a retirement home that they can enjoy in their twilight years.
Many may have paid off their home mortgage already and may wish to use the proceeds of the sale of their current family home to purchase a home to retire in without taking on another mortgage.
Real Estate Investors
Real estate investors looking for discounts frequently buy properties at auction and seek out short sale opportunities, which require them to be able to move quickly to closing. Under both circumstances, an all-cash deal is appropriate.
Delayed financing is a popular choice in general though with these all-cash buyers, who often seek to maximize liquidity and the number of real estate holdings that they can acquire.
Who Is Eligible For Delayed Financing?
There are rules in place that govern which loan applicants can capitalize on the practice of delayed financing, including but not limited to as follows:
- The total amount of the mortgage loan obtained cannot exceed the purchase price plus closing costs, prepaid fees and points. If you wish to access a property’s increase in value following renovations, you’ll need to wait 6 months and do a standard cash-out refinance.
- Applicants must be able to prove they paid for the property in cash.
- Applicants must be able to provide documented proof of the initial source of the cash that was used for the purchase (in order to satisfy rules and regulations aimed at curtailing money laundering).
- The property must have been purchased in an arm’s length transaction – meaning you can’t have a personal relationship with or be related to the seller, as in a non-arm’s length transaction – in order to prevent tax avoidance schemes.
- For any funds provided by a third party, applicants must provide a gift letter declaring the funds as a gift and specifically stating that no repayment is expected (so that lenders have a clear understanding of borrowers’ debt-to-income ratio and overall debt load).
- If you were provided with 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.
- The property must be free of liens.
How Does Delayed Financing Work?
A cash-out refinance allows you to reclaim equity held in your home by obtaining a new mortgage to replace your old preexisting loan. Delayed financing allows you to purchase a home with cash, perform any repairs or renovations needed to make it inhabitable, then obtain a cash-out refinance to reclaim funds used to acquire the property.
If you plan to live in the home, you should leave at least 20% of the home’s value in the mortgage so that you avoid having to pay private mortgage insurance, or PMI.
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How Does An Appraisal Work With A Delayed Refinance?
There is always a possibility that a home appraisal can come in for less than the buyer paid. Noting this, you should be prepared to leave more than 20% in cash reserves in order to both cover the difference between the appraised value and the purchase price as well as to avoid private mortgage insurance.
Is The Delayed Financing Process Different With Government-Backed Loans?
As a general rule, delayed financing is limited to conventional mortgages or jumbo loans. We don’t offer delayed financing for FHA, VA or USDA mortgages. These loans have unique requirements that govern the types of properties buyers can finance and the condition those properties must be in prior to closing on the loan.
The Bottom Line: Delayed Financing Can Keep You Liquid
Delayed financing offers the opportunity for you to make an attractive all-cash offer on a home while also enjoying the flexibility of a long-term mortgage. Put simply, it provides a means to stay cash-liquid while maximizing your ability to acquire real estate holdings.
Ready to gain access to the money you have tied up in your house? Talk to a Home Loan Expert at Rocket Mortgage® today.
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