Sometimes it makes sense to purchase a property outright and worry about lining up outside financing later.
For example, in a competitive bidding situation, a buyer who presents an all-cash offer has a much stronger offer than another buyer who must make their offer “contingent on financing,” which can take weeks to arrange and may never materialize.
Often, you can buy a home at a discount simply by coming up with fast cash and dealing with financing after the fact.
We call this technique delayed financing. In these situations, the borrower applying for a mortgage has already purchased the property.
Sometimes the strategy is deliberate: 87% of buyers rely on a mortgage to buy a home.
If you have the means to purchase a property with cash, and deal with the financing later, the advantage in a competitive market against most retail buyers is that powerful.
Sometimes buyers have no choice but to do a delayed financing. This can happen when bank financing falls through at the last minute, but you have to close on the house or forfeit a large earnest money deposit. Or you may be relocating for a job starting next week and you don’t have time to start from scratch.
If you can close without the mortgage, you can be confident that you can find an alternative lender to finance the property after the fact, via a delayed financing mortgage.
At the end of the process, you will own the home, have cash to replenish your savings or replace most or all of what you spent to pay for the home, and have a mortgage on the property with affordable monthly payments – generally on terms more favorable than you can get with a later cash-out refinance.
How delayed financing works
In some ways, a delayed refinancing mortgage works like a refinance: The buyer already has 100% equity in the home, or close to it. There’s typically no existing mortgage on the home, since it would normally be paid off at closing. The loan proceeds go to the borrower, not the seller.
There are some important differences between a delayed finance mortgage and a refinance, however. If you take out the delayed finance mortgage within 90 to 180 days of your purchase (depending on the lender), the lender may use their more favorable underwriting criteria for purchases, rather than their refinancing criteria. This means they may be willing to lend more on the property.
The valuation they use to calculate loan-to-value (LTV) will usually be based on either an appraisal, or the actual purchase price – whichever is less.
When not to use a delayed finance mortgage
Because delayed refinancing mortgages cap their LTV calculations on the lesser of these two numbers, many borrowers choose to deliberately wait until after the 180-day deadline has passed to apply for a mortgage.
Why? Because after 180 days, lenders usually disregard your own investment in the property. Instead, they calculate the max LTV based on a whole new appraisal. Normally this results in a much larger loan amount, and more cash in your pocket – especially if you bought the home at a discount to ARV, and fixed up the home so it’s more valuable than it was when you bought it.
So if your objective is to maximize the available loan amount, it may make sense to put off the refinancing until after the delayed finance mortgage deadline, to remove the artificially low cap on the size of the loan.
Why use delayed financing?
For buyers with access to enough cash to purchase a property without using a mortgage, delayed financing has several potential advantages:
- You can still go through with the transaction, even if your original lender pulls out of the deal. See here for more information on what to do if your original lender turns you down or pulls out of the deal.
- An all-cash offer is much stronger in a competitive bidding situation than one contingent on financing. Many times, it makes the difference between acceptance and rejection – even at a lower purchase price than competing offers.
- Lenders tend to treat qualified delayed financing loans like original purchases. As such, you are eligible for “rate and term” programs, rather than refinance programs. So you may qualify for more favorable loan terms and a higher LTV than may be available under straight cash-out refinancing loan programs.
- Unlike most straight refinance loan programs, a delayed refinancing loan typically does not require a six-month “seasoning” waiting period to get cash out.
- You don’t need to liquidate assets to raise cash after you buy the home, generating capital gains tax consequences.
- You can buy a “fixer-upper.” If the home didn’t pass inspection for a mortgage when you make the offer, you can still buy it for cash (often at a discount) and fix it up so it does pass inspection – then get a full delayed finance mortgage on the property, including your investment in repairs and rehab. Assuming you don’t generate significant capital gains taxes by selling appreciated assets to raise the purchase price, your cost of capital may be lower using this method than it is using a hard money loan to finance the purchase and repair of the property, and then getting a permanent mortgage on it.
In some cases, we can combine bridge financing with a delayed refinancing approach. This helps reduce the cost of capital while still preserving some liquidity for those who don’t have the cash on hand to complete the entire purchase.
When this happens, expect to use the delayed financing mortgage proceeds to pay off the initial loan, in most cases.
Where does the cash come from in a delayed finance?
The cash you use for a delayed financing deal can come from almost anywhere, though many lenders will want to know the source of funds, depending on the loan program.
Here are some of the most common funding sources buyers use in delayed financing situations:
Personal savings
This is obviously the quickest and least complicated.
Life insurance cash value
The cash value in permanent life insurance policies can provide a ready source of cash that you can use for any purpose – including acquiring real estate. This cash is normally available tax free. However, an outstanding policy loan reduces your death benefit. A delayed finance mortgage allows you to replenish your life insurance policy while still keeping the property.
Personal loans (friends/family)
It’s possible to get a delayed financing mortgage to allow you to quickly repay any personal loans. However, you must have purchased the home from the seller in an arms-length transaction.
Unsecured loans
Some people with exceptional credit can take out a personal loan or advance big enough to buy a piece of real estate. They then quickly refinance using a mortgage to get a better interest rate, lower payments, or both.
HELOC loans
You can use a home equity loan secured by another property.
Margin loans
If you have assets in a brokerage account, you may be able to borrow against those assets to buy real estate. Per Regulation T of the Federal Reserve Board, you may borrow up to 50% of the value of the securities in your brokerage account. Since you’re not selling anything at this point, there’s no capital gains tax for taking out a margin loan.
If the value of those securities falls, though, you may be subject to a margin call, requiring you to deposit more money to bring your account within the 50% requirement. Many people who use margin loans to finance real estate want to reduce this risk, and quickly do a delayed refinance using a mortgage secured by the property.
401(k) loans
If your plan sponsor allows, you may be able to take a loan from your 401(k) account to purchase the property. You have up to five years to repay your 401(k) loan. After five years, any remaining loan balance is deemed a distribution, which may generate income taxes and possibly a 10% early withdrawal penalty.
IRA rollovers
Once per year, you can withdraw money from an IRA or Roth IRA account penalty free, provided you place the same amount of money back in an IRA account within 60 days. That gives you two months to use IRA funds without generating an income tax or early withdrawal penalty liability. After two months, the IRS will deem the amount you withdrew to be a distribution, and income taxes and penalties may apply.
It’s very possible to arrange a delayed financing mortgage within 60 days. But if you’re using a 60-day IRA rollover to fund the original purchase, be sure to involve us as early in the process as possible, because time is of the essence.
Documentation
Getting a delayed finance mortgage (sometimes called a “technical refinance”) is very easy. Lenders will need a contract of sale, evidence of title, and the final CD/HUD/closing statement from your purchase. Additional documentation depends on the specific loan program.
How much can I finance?
The total amount you can potentially finance using a delayed finance mortgage is usually greater than the amount available under other loan programs.
There is no artificial “cap” on the amount you can qualify for. “Jumbo” mortgages and luxury properties valued at $1 million and up are great candidates for delayed financing.
Can I do a “cash out” refinancing using a delayed finance mortgage?
Yes, provided it’s a true “delayed financing,” meaning you didn’t use a mortgage to originally acquire the property, or there are no existing liens on the property.
If you bought the property using an unsecured loan, or a HELOC secured by a different property, most lenders will require you to use the proceeds from the delayed financing to pay down the previous loans.
Don’t lose your earnest money deposit just because the original lender pulls out
Delayed financing can be a solution if your mortgage falls through before closing, or if you get turned down outright by mortgage lenders for whatever reason. For example, you may want to go through with the purchase even without financing so as not to forfeit your earnest money deposit. The purchase gives you time to line up alternative financing, or correct whatever issues with your own situation or the property that caused the initial lender to turn you down.
If you can raise enough cash to purchase the property without a mortgage, a delayed finance mortgage lets you keep your deposit as well as the property.
Keep your home after a divorce
Many people emerge from a divorce or legal separation with a valuable house but in need of cash to live on. On other cases, one divorcing spouse may want to keep the home they’re bringing up children in, to minimize disruption to their lives. Keeping the home can also help save real estate commissions, closing costs, moving expenses, and other costs and disruptions associated with having to move.
If you recently legally acquired a property as a result of a divorce, separation, or dissolution of a domestic partnership, you may qualify for a delayed finance mortgage that can help solve your cash flow problems while allowing you to keep the house.
Inherited properties and “accidental landlords”
You may qualify for a delayed refinance mortgage if you recently inherited a property. This can be incredibly useful if you need cash to fix up or rehab the property, handle estate costs, or buy out other heirs. For example, you can use delayed financing mortgage criteria even though you inherited the property rather than purchased it outright for cash yourself – and then use the cash to purchase the interest of other heirs.
Not everyone wants to be a landlord, nor do most people have the skills or knowledge. If you’re an experienced real estate investor, or just have a strong interest, it makes sense for you to take a cash-out refinance and use the cash to buy out the others. That way, they get the cash they need, and you own the property yourself.
Conclusion
Whether you’re considering buying a property for cash, “rescuing” a deal where the original lender backed out, or you’ve recently acquired property via inheritance or divorce, we can help you secure or keep the property, and put cash in your pocket.
However, the best time to act is now – or as soon as possible after you have the property. The sooner you apply for a delayed finance mortgage, the more options you may have, and the better the terms you may qualify for.
To get started, or to explore your options, contact us today.
