Want to get the best deal on a home? Pay cash. Want to outbid a bunch of other buyers seeking the same property? Pay cash. Want to buy a fixer-upper that the bank's leery of financing? Pay cash.
Can't afford an all-cash purchase? You might try something called delayed financing.
Delayed financing is a way of purchasing a home in which you pay cash up front, then almost immediately or shortly thereafter obtain a cash-out refinance to mortgage the property, which returns a big chunk of your money to you. This gives you the best of both worlds - you get the advantages of paying cash up front while still being able to finance the loan over time.
What are the advantages?
At first glance, this may sound like the old story about trying to lengthen a blanket by cutting a foot off one end and sewing it on to the other. Why pay cash if you're just going to turn around and borrow it back again? But there can be some very sound reasons for taking this approach.
- Sellers will favor someone with cash in hand over just about any other type of buyer. You can often get a better price by offering cash or at the very least, get your bid accepted over comparable offers that require several weeks to arrange financing.
- Wealthy investors have flooded the U.S. housing market in recent years, snapping up properties and paying cash. All-cash transactions currently account for one-quarter of all existing home sales, according to the National Association of Realtors, and that's down from a level of one-third last year. Cash purchases are particularly common on bank-held foreclosed properties, so if you want to compete for one of those deals, cash is your best friend.
- Delayed financing can be a useful alternative to an FHA 203(k) mortgage to buy a home and fix it up. With a 203(k), you can borrow both the purchase price and money to repair or improve the property as part of a single mortgage. However, with an FHA loan you have to pay a sizeable fee for up-front mortgage insurance, as well as an ongoing monthly mortgage insurance premium as well. With delayed financing, you can avoid the cost of mortgage insurance completely by maintaining at least 20 percent equity in the property. However, you can't borrow more than the amount you paid for the home for at least six months after the purchase.
- You can also use delayed financing to buy and rehabilitate a home that won't currently pass a home inspection or otherwise won't qualify for mortgage financing. You buy the home and restore it using your own funds, then when the work is completed, take out a cash-out refinance to recover a big chunk of the money you put into the project, thereby regaining financial liquidity. Again, you're limited to borrowing no more than the purchase price of the home.
- Retirees or empty-nesters may wish to consider delayed financing when downsizing to a smaller home, or to improve their cash-flow position in lieu of a reverse mortgage. They draw upon their assets or sell their existing property in order to pay cash for the new home, then take out a cash-out refinance to free up funds that would otherwise be tied up in the new home.
- Delayed financing can also be used as a bridge loan to cover the time between when you buy a new home and sell your old one. If the seller of your new home won't wait for you to sell your old one before closing, and you can't get a mortgage for the new one as long as you're making payments on the old, you can use delayed financing to pay cash for the new one, then refinance it into a regular mortgage once the old one has sold.
Cash is only temporarily tied up
Of course, the main limitation of delayed financing is that you have to be able to assemble the cash up-front to make the purchase in the first place. Delayed financing doesn't provide you with additional funds, it only allows you to recover funds that you've tied up temporarily in buying the new home.
Delayed financing works for people who have the financial assets to buy a home outright, but need to hang onto those assets for other purposes, such as retirement savings or investments. It allows you to draw on those assets temporarily to make the home purchase, then restore them with the funds obtained by refinancing. In some cases, that can make better financial sense that trying to arrange conventional mortgage financing.
Delayed financing is often used in purchases of multi-million dollar homes, with the financing arranged through what is called the "nonagency market" - loans that are not backed by Fannie Mae, Freddie Mac, the FHA or the like, and so are not subject to their limits and rules. However, Fannie Mae does have a delayed financing program in place - making this product available and affordable for borrowers seeking to use it for modestly priced homes as well.
Fannie Mae delayed financing is available on homes priced up to the local loan limits, which currently range from $417,000 to 625,500 for single-family homes, depending on location. The delayed financing option is available up to six months after the purchase, after which conventional refinance or home equity financing options become available.
Can tap up to 70 percent of equity
Delayed financing can be used on primary homes, second homes or investment properties. Owners of primary homes may take up out to 70 percent of the home's value when refinancing; the limit is 60 percent for second homes and investment properties.
Purchasers must be able to show where they obtained the cash used to buy the home. If a home equity loan or other type of mortgage was used, the proceeds from the delayed financing must be used to pay off those loans first.
The purchase of the home must have been arms-length, meaning it cannot have been bought from one's parents, business partners or others with a close relationship to the buyer. Similarly, there may be no outstanding liens on the property, such as a home equity loan or other mortgage. The original HUD-1 or comparable documentation must be provided to show proof of the sale and to show the property was purchased free of any mortgages or liens.
This is a somewhat unusual mortgage product and not all lenders will offer it. It's a good idea to seek out a loan officer who is experienced in working with delayed financing and understands the ins and outs of the loan, and the various requirements that must be met, as well as being able to explain the advantages and disadvantages compared to other financing options.