Delayed financing is when someone pays cash for a home and then reimburses themselves with a cash-out refinance shortly after purchase.
Why would someone do this? Probably because they are in a market where buyers heavily outnumber sellers.
In these circumstances, some sellers may refuse even to consider offers from those who need a mortgage. So, only all-cash buyers get the deal.
Delayed financing allows those with plenty of financial resources to buy their dream homes or investment properties as cash buyers, even if they ultimately need a mortgage to keep their money liquid.
In other words, they can buy the home with their own savings, perhaps plus assets they use as security on a short-term loan. And, once they’ve moved in, they can take out a mortgage to pay themselves back and restore their liquidity.
It’s not just people buying homes that they’ll live in themselves who use a delayed-financing strategy. Some professional home flippers do the same, employing the proceeds of the new mortgage to buy their next project and to carry out the necessary remedial and cosmetic work to market the property successfully. It works, too, for those buying at auction.
Good to Know
- Delayed financing is a strategy to gain a competitive advantage in a seller’s market by making a cash offer. After closing, the buyer reimburses herself with a mortgage.
- It’s typically hard (or impossible) to get a delayed finance mortgage with government-backed (FHA, VA and USDA) loans. Use a conventional or jumbo loan instead.
- Delayed finance requires you to have significant financial resources, so it’s not for everyone. But it can be an efficient way for wealthier people or investors with cash stockpiles to get the homes they want.
Why Use Delayed Financing?
The principal benefit of delayed financing is to get your purchase offer noticed by your seller. All-cash offers always land on the top of the pile because they’re more likely to get to closing faster and unhindered.
It’s unfortunate for buyers who have got themselves pre-approved for their mortgages that their offers end up on the second tier, immediately below those from cash buyers. But you can’t blame sellers. There’s no need for a finance contingency, which makes cash offers inherently more likely to come to fruition.
But there are other advantages. Cash purchases tend to close much faster than those involving mortgages. You can refinance more quickly than if you had originally bought with a mortgage.
Delayed Financing Examples
For a Primary Residence
Julie Homebuyer wanted to buy a $2-million home using a jumbo mortgage. She was preapproved for a mortgage. However, sellers kept declining her purchase offers because they preferred cash buyers.
Julie knew she could get approved for a delayed financing refinance after the purchase, since she had a pre-approval in-hand. She purchased the home with cash, then got a cash-out refinance for 80% of the purchase price after the fact.
For an Investment Property
Jeremiah Investor had his eye on a fourplex listed at $750,000 in a red-hot rental market. He knew the listing would attract serious competition — especially from cash buyers. Jeremiah had the funds available, so he made a cash offer and closed within two weeks, beating out several financed buyers.
His plan all along was to use delayed financing to pull his cash back out. Within a month of closing, he applied for a conventional mortgage and got approved to cash out 75% of the property’s appraised value. The refinance gave him over $550,000 back, which he used to fund renovations and begin scouting his next investment.
Delayed Financing Eligibility Requirements
We’ve mentioned before that government-backed loans don’t allow delayed financing. So, you’ll need to be eligible for a cash-out refi using a conventional loan.
To be clear, you don’t have an existing mortgage, so you won’t be undertaking a cash-out refinance as such. But delayed financing lenders tend to impose the same rules and charge the same rates as they do for cash-out refis.
What are the minimum eligibility requirements most lenders have for one of those? Well, you’ll likely need a:
- Credit score of 620, but hopefully much higher since cash-out rates are sky-high, even with good credit
- Debt-to-income ratio of 43% or lower
- Minimum of 20% retained equity after the cash-out, meaning you can borrow up to 80% of the home’s appraised value
- Stable employment and income history for the last two years
Individual lenders may be willing to give you a little leeway if you’re a bit under one threshold but are stronger than required on others. But, if your loan is branded Fannie Mae or Freddie Mac, those will generally be firm minimums.
There are a few other requirements:
- You can’t have had a pre-existing relationship with the seller
- The final home purchase settlement statement must show no financing was used for the purchase
- You must document the sources of all your funding to meet money laundering laws
- Gift funds used to purchase the home in case may not be reimbursed with funds from the new loan (because then it wasn’t really a gift according to lending rules)
- Any loans on other properties used to purchase the home in cash must be paid off in full
- The home must be free of liens, meaning legal encumbrances. Get title insurance
Delayed Financing Pros and Cons
Pros
- As a cash buyer, your offer gets to the top of the pile in sellers’ markets.
- Normally, lenders require you to wait at least six months before refinancing. But with delayed financing, you’re exempt from that rule — because you’re not paying off an existing mortgage.
- If you have a lot of illiquid assets, you may be able to borrow your initial loan using these as security. Not having to sell them could see substantial savings on capital gains tax. Keep in mind you have to pay off any loans used to acquire the home in cash.
- Can be used for second homes and investment properties as well as primary residences.
Cons
- If mortgage rates rise between your buying and your delayed financing, you may pay a higher rate than planned. Conversely, this is a pro if rates fall.
- Only available on conventional and jumbo loans.
- There’s always a risk (usually small) that you’ll uncover a defect in the home once you own it that affects its value and mortgageability.
- Conventional lenders will charge you cash-out refinance rates, which can be higher than purchase or no-cash-out refinance rates, especially with lower credit scores.
Delayed Financing vs. Standard Cash-Out Refinance vs. Purchase Mortgage
Delayed financing and a standard cash-out refinance are the same program except that delayed financing has no seasoning requirement. And, the value basis is the initial purchase price, not the current appraised value based on upgrades.
So let’s say you plan to buy a home and cash it out based on a higher value after improvements. You are better paying cash for the home and improvements, then doing a cash-out based on a new appraisal when all the work is done (at least six months later)
If you are simply trying to acquire the home, a delayed-financing cash-out will work just fine.
If you are trying to keep as much cash available, it’s best to purchase the property with a 5-10% down purchase loan. A 90-95% loan-to-value is not available with delayed financing or traditional cash-out loans.
Delayed Refinance Time Limits
You have six months from the time of purchase to reimburse yourself with a delayed financing cash-out loan. After that time, you can get a standard cash-out refinance with seasoning requirements, assuming there’s no mortgage on the property.
The mortgage must be 12 months old to pay it off with a cash-out refinance.
How to Get Delayed Financing
To minimize the risks of delayed refinancing, it’s best to get professional advice before embarking on your purchase. Talk to a financial advisor, CPA or a lenders’ loan officer to confirm that this is a sound strategy for someone in your circumstances.
Getting a home inspection and title search done before closing can be a smart move. You’ll have trouble with your mortgage application if the home has previously undetected major defects or if there are liens on its title. Title insurance might be a good idea, too.
An appraisal may be a contingency too far. But talk to local real estate agents to make sure you’re not paying too much for the home. The amount you can subsequently borrow will depend on an independent appraiser’s valuation.
Once you’ve closed on your purchase, you simply make a conventional mortgage application in the normal way. We say “simply,” but you probably already know that these applications involve a lot of paperwork and admin.
Is Delayed Financing Right for You?
Delayed financing works well, but you have to purchase the home in cash first. Few of us have the cash or assets to buy a home outright. In general, delayed financing is usually best for:
- Competitive buyers who want to make cash offers
- Investors who want to stay liquid and move quickly
- Buyers with substantial assets but poor mortgage timing
- House flippers and auction buyers who plan to refinance soon after closing
Delayed financing can deliver some real advantages, especially if you’re going to need a cash-out refinancing anyway soon after closing. Not only will an all-cash offer give you credibility with sellers, but you’ll also pay only one set of closing costs.
If you think you might benefit from delayed financing, talk things through with a trusted professional.
Ready to get started? Start your application with Refi.com here.
Fact-checked by Tim Lucas.
