Pre-approval, financing, cash offers... there are so many real estate phrases to keep track of! And when you're anxious to purchase a home, you don't want to miss out because you misunderstood.
That's why our team of mortgage experts cuts through the noise to explain all about delayed financing for cash buyers. In a nutshell, delayed financing for cash buyers is when a buyer makes a cash offer and then a lender agrees to fund the purchase of a property before the final sale closes.
This can be an extremely helpful tool for those looking to buy a property but who don't have all the upfront money available long-term. Keep reading to learn more about delayed financing and how it can work for you!
What does it mean to be a cash buyer?
"Cash buyer" is a term used to describe someone who can purchase a property without financing. In some cases, this means the buyer has the entire purchase price upfront.
In other cases, it could mean the buyer has a loan lined up but the transaction will close quickly so there is no need for traditional banking procedures like appraisals or underwriting.
Delayed financing for cash buyers mixes these scenarios and adds a dash of cash-out refinancing, as well.
Delayed financing, defined
Delayed financing happens when a home buyer makes a cash offer but lines up a lender who agrees to fund the purchase of a property before the final sale closes. The goal is to give the cash buyer more time to come up with the remaining funds needed to complete the purchase.
All-cash offers are becoming more common as a way for buyers to keep up in the competitive, hot housing market. Thus, delayed financing is becoming more common, as well. In fact, cash offers rose 5% year over year from 2020 to 2021. That number is still climbing this year.
Delayed financing allows you to get an equity loan after you purchase a property for the same amount. In the simplest form, delays can be obtained through acquiring a new home and paying upfront cash and then rapidly acquiring a cash-in refinancing to mortgage the property.
Thus, delayed finance essentially allows you to purchase a property with cash first and then do a cashout refinance after the purchase. You buy a house and take out a loan against the equity in the house shortly thereafter.
In essence, delayed funding means delayed loans. Homebuyers and investors can get a loan quickly and receive cash for their property. It eliminates keeping money in a place you could use for more productive purposes elsewhere.
How does delayed financing work?
Delaying financing starts by getting the cash to acquire the property. You can collect that money in a variety of ways. For example, some people supplement their cash savings by dipping into retirement funds or selling stocks.
However, long term, most people want to replenish those reserves. Thus, delayed financing gives them access to cash upfront for the home sale, followed by funding the loan shortly after si they can repay themselves the “borrowed” finance.
The application process for delayed funding also resembles applying for borrowers' mortgages. It requires an employer's proof of work and verification of credit. Like a loan prequalification, borrowers need a stable credit history between buying and receiving a mortgage.
To take advantage of delayed financing, you'll need to apply for pre-approval with a lender. Your pre-approval letter will state that the funds to purchase the property will be released once the final sale closes.
The delayed financing process is relatively simple. Once you've found a property you're interested in, your agent will put in an offer, and, as long as the offer is accepted, they will also submit a request for delayed financing on your behalf.
The lender will then do a preliminary review of the file and if everything looks good, they'll approve the loan and release the funds to close.
What is a cash-out refinance?
A cash-out refinance is a loan where the borrower takes out a new mortgage for more than they currently owe on their home. The difference between the new mortgage and the old mortgage is then given to the borrower in cash.
In a delayed financing situation, the cash-out refinance establishes a traditional mortgage for the buyer, while allowing them to recoup some of their upfront cash costs, as well.
In Texas and some other states, there are specific rules and regulations when it comes to cash-out refinancing. However, these typically do not apply to delayed financing.
Cash-out refinancing rules
When you pursue a traditional home equity refinance, one of the requirements is that the owner must be on the property title for at least six months. However, delayed financing is an exception.
The delayed financing exception allows homebuyers who pay cash upfront to apply for cash-out refinancing immediately. There is no waiting period.
These exceptions and regulations are set by Fannie Mae and Freddie Mac, the federally backed home mortgage companies created by the United States Congress.
Who is eligible for delayed financing?
Anyone who meets Fannie Mae's eligibility requirements can qualify for delayed financing. To be eligible, you must have at least 20% equity in the property you're purchasing and the transaction must close within 60 days.
In addition, the property being purchased must be your primary residence and you can't have any other financed properties. Like any loan process, you’ll need to meet certain financial criteria and be prepared with backup documentation.
Another regulation to avoid financial indiscretion is that the home purchase must be “arms-length.” That means the home cannot have been bought from the buyer’s parents, business partners, or others with a close relationship.
Further, the property may not have any outstanding liens, such as a home equity loan or other mortgages. And you will have to document the source of your cash. For example, show bank statements, retirement fund statements, loan information, or even a gift letter if a family member is providing you with supplemental cash.
Fannie Mae delayed financing is available on homes priced up to the local loan limits. In 2022, those loan limits are higher than ever. You can’t obtain a mortgage higher than the total of the purchase price, closing costs, points, and fees.
The delayed financing option is available up to six months after the purchase. After that time, if a buyer hasn’t funded the home purchase through delayed financing, they can always apply for a conventional refinance or home equity line.
How does delayed financing work for cash buyers?
For cash buyers, delayed financing works a little differently than it does for those who need to finance their purchase.
With delayed financing, the cash buyer is still responsible for coming up with the remaining funds needed to complete the purchase. These funds can come from a variety of sources, including a loan, personal savings, or family and friends.
In a typical financing situation, a buyer will need to come up with just a downpayment, which may be anywhere from 3% to 20% of the purchase price. With delayed financing, there must be more cash available to make the purchase, even though it will be recouped later via traditional financing.
Is delayed financing different from government-backed loans?
There is a common misconception that delayed financing is the same as a government-backed loan. However, this is not the case.
A government-backed loan is when the government agrees to fund part or all of the purchase price. For example, the FHA mortgage program. This program is backed by the government and provides low-interest rates and relaxed eligibility requirements to home buyers.
Instead, these are considered "nonagency market" loans. This means that the lender is not backed by the government, and therefore, has more flexibility when it comes to eligibility requirements.
So while Fannie Mae and Freddie Mac set the eligibility rules, neither institution actually originates or services its own mortgages. Instead, they buy and guarantee mortgages issued through lenders in the secondary mortgage market.
What to consider with delayed financing
While delayed financing can be extremely helpful in getting you into your dream home, there are a few things to keep in mind:
- You'll need to apply for pre-approval with a lender and receive approval before making an offer on a property.
- The transaction must close within 60 days.
- The property being purchased must be your primary residence.
- You can't have any other financed properties.
What are the advantages of delayed financing?
While at first glance delayed financing seems like a bait and switch with the same result, there are advantages to the method. For example, delayed financing can help cash buyers avoid paying for private mortgage insurance (PMI).
In addition, delayed financing gives the buyer more time to come up with the remaining funds needed to close on the property. This can be helpful if you're waiting for a down payment or other closing costs to come through.
It also means that your cash will only be tied up temporarily. As noted earlier, this gives buyers more flexibility with how they collect cash for the purchase, since they know they’ll be able to repay those sources quickly.
What are the disadvantages of delayed financing?
The main disadvantage of delayed financing is that it delays your ability to get into your new home. In some cases, this could mean you have to live in temporary housing or with family and friends while you wait for the final sale to close.
And delayed financing can also be more costly in the long run. In fact, if you're not able to close within 60 days, you could be charged a late payment fee by your lender.
There are also some risks involved. For example, mortgage rates could go up if you wait too long to get your mortgage after buying, resulting in higher payments. And there’s always the biggest risk - that you won’t be able to get financing if issues with the home arise after the purchase.
Do all mortgage lenders offer delayed financing?
Not all mortgage lenders offer delayed financing. That's because it's not a government-backed loan, but rather an agreement between the buyer and the lender.
Delayed financing is becoming more popular, but overall it’s still a somewhat unusual mortgage product. Thus, not all lenders will offer it.
It's best to seek out a loan officer who is specifically experienced in working with delayed financing to guarantee they will understand the ins and outs of the loan and various requirements.
Applying for delayed financing
If delayed financing sounds like something you'd be interested in, the best way to find out more is to apply for pre-approval with a lender. This will give you a better understanding of what you need to do to qualify and how much you can borrow.
You’ll likely need to speak with a financial advisor or CPA to discuss the best strategy for gathering the cash. They will be able to advise you of associated risks and various tax implications.
The bottom line: delayed financing can keep you liquid
Delayed financing provides a way to make the best all-cash offer on a new house and enjoy the flexibility of a long-term mortgage. In simple jargon, the system offers a way to remain cash-liquid with an increased ability to purchase the property of your dreams.
Therefore, delayed financing is a great tool for cash buyers who are looking for more time to come up with the remaining funds needed to purchase a property. It's important to remember that, while delayed financing does provide some breathing room, the cash buyer is still responsible for coming up with the funds needed to close.
For homeowners in a competitive market, this might be the ticket to success. If delayed financing sounds like something you might be interested in, contact our experienced lending team today to learn more.