What is delayed financing for cash deals?

Delayed financing refers to making an all-cash offer to buy a home while planning to get a loan after closing. It gives buyers the advantage of making a cash offer, which is more appealing to home sellers, while letting them take advantage of the long repayment terms offered by using a mortgage to buy a home. Generally, delayed financing comes in the form of a cash-out refinance on the home.

Delayed financing is particularly popular for investors, who often have the resources to make cash offers but who still want the benefit of leverage offered by financing.

We’ll break down how delayed financing works, why it’s advantageous, and how to decide whether it’s right for you.

What makes delayed financing different from other loans?

Delayed financing differs from other types of mortgages in a few ways. For one, you get delayed financing after you’ve purchased the home, which makes it different from most mortgages, which you apply for prior to buying the property.

Here is how a delayed financing loan differs from some popular types of home loans.

• Bridge loans. Bridge loans are loans that you get before buying a home to bridge the gap between when you buy the property and sell your old one. These are short-term loans, usually ranging from a few months to a year. By contrast, delayed financing involves paying cash upfront rather than getting a loan before the home purchase.
• Traditional cash-out refinancing. A traditional cash-out refinance is a loan you can get at any time after you’ve purchased your home to take equity out of the property. Typically, you need to wait some time, such as six months, between getting a mortgage and applying for a new one. Delayed financing differs from these typical cash-out loans because you can get one right after buying the home due to the fact that you paid cash.
• Conventional loans. With a conventional loan, you apply for the loan prior to buying the home rather than after purchasing the home with cash.
• Portfolio loans. Portfolio loans also involve applying for a loan before buying the home. The difference between these and conventional loans is that lenders keep portfolio loans on their books.

Delayed financing and government-backed loans

Unfortunately, you can’t get delayed financing for government-backed loans. That means lenders won’t refinance your home with an FHA, VA ¹ or USDA loan. These types of loans have strict requirements on the properties buyers can purchase, such as where the home is located and its condition. This may not be ideal if you’re an investor or someone who wants to buy a home outright in cash.

You can, however, get delayed financing with conventional loans, which are mortgages backed by private lenders such as banks and credit unions. You can also get delayed financing with conforming loans, like ones backed by Fannie Mae and Freddie Mac.

Why delayed financing is attractive for investors

The primary benefit of delayed financing is that it lets buyers make a cash offer to buy a home. Cash offers are appealing to sellers because they show that the buyer has financial resources and removes the chance that the buyer fails to get a mortgage, making the sale fall through. The lack of the need for mortgage underwriting can also speed up closing.

Investors who can make cash offers can often close quickly and have an advantage when bidding against people who make offers that contain a loan contingency. Delayed financing lets investors make cash offers while giving them the flexibility and access to capital offered by using a mortgage to buy a home.

Buyers who want delayed financing include:

• Real estate investors: Homes that are deeply discounted – like foreclosures, auctions, and short sales – are popular with real estate investors and are often bought with cash.
• Rehabbers: Many traditional lenders don’t offer financing for properties considered fixer-uppers. Instead, rehabbers will bypass the lending process and pay in cash. Then, they’ll use delayed financing to access their home equity to pay for renovations.
• Short-term rental owners: By purchasing a cash home and then getting delayed financing, short-term rental investors can finance renovations or free up cash to purchase other properties.

How delayed financing works in real estate

To use delayed financing to buy a home, you can follow these steps:

1. Contact a lender. Search around and find a lender that appeals to you. Check with the lender to ensure that it offers delayed financing loans.
2. Shop for a home and make a cash offer. Work with a real estate agent to find properties that meet your needs. When you find one that appeals, submit an offer to buy the home in cash.
3. Close on the home. If the seller accepts your offer, close on the property and pay in cash.
4. Apply for a cash-out refinance. Work with the lender you contacted to apply for a cash-out refinance, taking equity out of your new home. If you want to refinance again later, you may have to meet certain requirements.
5. Make your new loan payments. Once the loan is approved, you’ll get cash out of the home and start getting a mortgage bill each month. Make sure you can afford the monthly payments and make them each month.

Ways to get delayed financing

Before you start shopping for a home, speak with a lender about options for delayed financing that are best suited for your situation. Compare rates with multiple lenders to find the best rates and terms.

Once you’ve found a good lender, you can start home shopping. Find a home you like, make an offer to buy it, and pay cash. Then, you can apply for a cash-out refinance.

When you’re ready to apply, gather all your documentation ahead of time, like bank statements and a gift letter if someone gave you money to purchase the home.

Eligibility and requirements

As with any type of home loan, you will need to meet minimum eligibility requirements for delayed financing:

• Purchased property in an arm’s-length transaction: This is the opposite of non-arm's-length transactions, meaning that the seller isn’t a relative, friend, or other close relationship.
• Provide proof of funds: You will need to show the lender proof of funds that you used to buy the home. Documentation could include bank statements or gift letters.
• Meet mortgage loan limits: Lenders will only allow you to get delayed financing up to the home’s purchase price, plus any fees paid for the new loan.
• Have no liens on the property: The home needs to be free of any existing liens and have documentation showing that the buyer paid for the home all in cash.
• Loan amount limits: Lenders base your maximum loan amount on the lesser of these two numbers – the original purchase price and the current appraised value. Lenders will require a property appraisal. Lenders place this requirement to help reduce their risk.

Pros and cons of delayed financing

Delayed financing lets you get many of the benefits of paying for a home with cash while also getting the benefits of financing a property. However, while all forms of financing involve risk, delayed financing can be riskier in some ways, so consider the pros and cons, as well as your risk tolerance, before using this strategy.

Pros

Some benefits of delayed financing include:

• Make an all-cash offer. Delayed financing lets you make all-cash offers to buy a home, which can make your offer more appealing to sellers.
• Buy distressed properties. In some cases, lenders won’t be willing to offer financing for fixer-uppers or distressed properties. Because you’re paying cash, you may have more options than someone using upfront financing.
• Quicker closing. You don’t need to go through the mortgage process before buying a home, which means you may be able to close on the home more quickly.
• Refinance to get equity out of the home. You can still benefit from the leverage offered by a mortgage by refinancing the property after buying it.

Cons

Some drawbacks of delayed financing include:

• No government loan programs. Some loan programs, such as FHA loans or VA loans, can’t be used for delayed financing. You’ll have to rely on conventional loans and conforming loans, which could also come with limits on how much you borrow.
• You may not qualify. While you likely have good credit and finances if you can afford to pay cash for a home, there’s always a chance you will fail to find a willing lender after you buy a home, which could leave you with a lot of equity stuck in the property.
• Refinancing costs. Refinancing a home, even with delayed financing, costs money. You’ll pay closing costs and other fees, so think about the cost of refinancing compared to just keeping the home you paid for in cash.

The bottom line: Delayed financing can help you reach your goals

Delayed financing lets homebuyers get many of the benefits of all-cash offers while still having the flexibility of using a mortgage to buy a home. By paying cash up front, you make your offers more appealing. Cash-out refinancing then puts some of the cash you used to buy the home back in your bank account so you can use it for other purposes, leaving you with a monthly mortgage payment instead.

If you’re considering using delayed financing to buy a home or are thinking about a cash-out refinance, you can reach out to Rocket Mortgage to see what you qualify for.

¹Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.