- Understand what delayed financing is and how it can benefit home buyers
- Explore the eligibility and requirements of delayed financing
- Weigh the pros and cons of delayed financing to determine if it is your best homebuying option
What is delayed financing?
Delayed financing is a method of purchasing a home where you get a mortgage after a cash purchase goes through. In this case, you purchase the home with cash and then immediately obtain a cash-out refinance mortgage. Using delayed financing gives you the leverage of being a cash buyer while still enjoying the mortgage’s benefits.
Why do homebuyers choose delayed financing?
Buying a home with cash can prove beneficial for homebuyers, especially in a highly competitive market. Because a cash sale does not require a mortgage, it allows for a speedier sale process, making it more attractive to the seller. In many cases, a seller is more likely to accept a cash offer for this very reason. In addition, offering cash for a home purchase can often help you negotiate a lower selling price.
While purchasing a home with cash converts your liquid assets to home equity, choosing delayed financing allows you to immediately cash out the equity, unlike other cash-out refinancing options that require a six- to a 12-month waiting period.
How does delayed financing work?
Using delayed financing begins with acquiring the funds to make a cash offer. This can mean dipping into savings or selling assets, such as stocks or other properties. Once you have the available cash and make an offer, you apply for delayed financing on the property. This application process is similar to a traditional home loan, and you will need to provide your financial information, proof of income, and a credit check. Choosing to use delayed financing is similar to a refinancing mortgage loan, except borrowers do not have to be on the home’s title for a minimum 6-month period.
When should you use delayed financing?
So, you might wonder why you would consider delayed financing instead of a traditional mortgage or waiting and choosing a refinance option later down the road. While delayed financing is definitely not for everyone, let’s look at some of the pros and cons associated with delayed financing.
- Buying a home in a hot real estate market. If you are in a hot real estate market, winning a bidding war on a home can be difficult. Offering a cash bid often puts you at the top of the list as the seller knows the deal will go through.
- A traditional mortgage may not be available. Buying foreclosures, short sales, or fixer-uppers means they may not qualify for traditional financing. Purchasing the home with cash allows you to make necessary changes to the property to qualify for a new mortgage.
- Purchasing investment properties. Purchasing a home with cash allows you to prepare the home for potential renters. Once you are ready to rent and take in rental income, you can apply for delayed financing to move on to your next investment property.
- Allows you to invest cash. While purchasing a home with cash gives you leverage in the buying process, acquiring delayed financing allows you to get that cash back to return to investments.
- Offers tax deduction. Having a mortgage on your home allows you to deduct mortgage interest from your taxes.
- It can help you build credit and establish a favorable credit history.
- You must have the entire purchase price in cash. This can be difficult if you do not have assets available.
- Only available on conventional loans. Delayed financing is only available for conventional loans backed by Fannie Mae or Freddie Mac, so FHA, VA, or USDA loans are not available. In addition, there are many additional requirements in order to qualify for delayed financing.
- The risk is that your financing won’t be approved. If problems arise with the property after purchase, you may not qualify for delayed financing.
- Interest rates could increase. Interest rates may rise depending on how much time passes between purchasing and financing.
Delayed financing guidelines
When it comes to delayed financing, you will receive the best mortgage rates with conforming loans that are eligible for resale to Fannie Mae or Freddie Mac. However, certain requirements must be met to qualify for these delayed financing mortgages.
Types of loans
In general, delayed financing mortgages are limited to conventional and jumbo loans and are not available for FHA, VA, or USDA mortgages.
Conventional loans are offered by most lenders and conventional conforming loans follow the guidelines established by Fannie Mae and Freddie Mac. In most cases, a conventional loan has a maximum loan limit and with delayed financing, you must maintain at least 20% equity in the property to avoid the additional cost of mortgage insurance. In addition, you will need to meet the general requirements for a conventional loan, including a credit score of 620 and above and a DTI below 50%.
A jumbo loan is a non-conforming loan, meaning it is not restricted by the guidelines established through Fannie Mae and Freddie Mac. In this case, your delayed financing loan can be more than the standard conforming amount, but you will have higher requirements in order to qualify. In general, you will need a credit score of at least 700, and DTI below 43%, and at least 20% equity in the property.
Eligibility and Requirements
- Property must be lien-free
- You must be able to provide proof of a cash purchase
- You must show documentation of where the initial cash came from. If you received money from a third party as a gift, you must provide a gift letter and any money obtained through the delayed financing cannot be paid back for the “gift.”
- The mortgage loan amount cannot exceed the purchase price plus closing costs, prepaid fees, and points. If you want to take advantage of any renovations made and the increased value, you will need to wait to qualify for a standard refinance loan.
- The property must be purchased in an arm’s length transaction, meaning you can have no prior relationship with the seller.
- A new appraisal is necessary for a delayed financing loan
- Your loan options are limited to conventional or jumbo loans, meaning an FHA, VA, or USDA loan is not an option.
These eligibility requirements are for conforming loans eligible for resale to Fannie Mae or Freddie Mac. If you apply for a non-conforming or jumbo loan, these requirements do not apply.
Using delayed financing to purchase your dream home
If you have cash available to purchase your home, taking advantage of delayed financing can help you look better in the eyes of the seller and increase your chances of securing a bid while still allowing you to remain cash-liquid. Hero Home Programs’ goal is to help you achieve your dream of homeownership. Whether you have questions about delayed financing or other home loan questions, our team is here to help. Contact us online today.