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Delayed Financing: What It Is And How It Works For All Cash Home Buyers

Miranda Crace9-MINUTE READ
May 26, 2021

The nation is continuing to experience a very competitive real estate market that tends to favor sellers. With a still low housing inventory currently available for sale, home buyers are still finding it hard to compete with other buyers, who are making high offers above asking price or scooping up homes before there’s even time to attend an open house.

In such a competitive market, you may need to find other ways to get your offer accepted than offering at or above the asking price. One way is to make a cash offer, which means that the seller will walk away with your money and no lender will be involved.

Putting all your cash into your home can deplete your cash reserves and leave you feeling financially stressed. Fortunately, many cash buyers can now take advantage of delayed financing loans to help them regain their economic equilibrium.

Let’s take a look at what delayed financing is and why there are more offers for delayed financing loans now than ever before.

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What Is Delayed Financing?

The typical route to purchasing a home is to apply for a mortgage after getting a purchase offer on a home accepted. But today’s competitive housing market is causing some homeowners to consider making all-cash offers to have hope of getting their offers accepted.

Making an all-cash offer can be pretty draining on your savings, however. To combat this, you might consider delayed financing. Delayed financing allows a cash buyer to reclaim some of the equity they put into the home when they bought it for cash. It’s essentially a cash-out refinance performed immediately (within 6 months) after buying the home.

You can use delayed financing for primary residences, second homes and investment properties.

Fannie Mae (FNMA) And Delayed Financing

Traditionally it’s house flippers – investors who buy houses in disrepair to renovate and sell – who buy houses in cash. That’s because they’re often buying homes in short sales and from financial institutions that are selling homes they’ve acquired through foreclosure. For them, unlike regular buyers, delayed financing is a relatively normal part of doing business.

However, in 2020, this began to change. As the housing market began heating up and interest rates were at historic lows, regular buyers began to make cash offers at unprecedented rates to have a chance at buying a home amid a time of unprecedented bidding wars. Suddenly, there were more all-cash buyers interested in delayed financing.

Fannie Mae has offered delayed financing options since around 2011. Around then, it changed its previous rules and decided to allow borrowers to get a cash-out refinance before the usual 6 months post-closing mark.

Rocket Mortgage® offers delayed financing to qualifying buyers.

How To Apply For A Delayed Financing Mortgage

You must typically apply for delayed financing within 6 months of closing, and you can usually apply immediately after purchasing the home. As with any mortgage loan, the lender will need to review your income, assets and credit. In addition, you’ll need to show documentation of the source for the cash used for the original purchase and proof of the transaction.

Fannie Mae requires lenders to conform to their rules for delayed financing if they want Fannie Mae to purchase their mortgages after origination. These rules include:

  • The new loan amount cannot exceed more than the actual documented amount of the borrower’s initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points on the new mortgage loan.
  • There can be no liens on the property.
  • The sale must have been an arms-length transaction, which means you cannot purchase the home from a relative or have any kind of personal relationship with the seller. This measure is intended to prevent various types of tax avoidance or mortgage fraud.
  • An appraisal must be obtained when starting the delayed financing loan.
  • You must be able to prove that you paid cash for the property.
  • Delayed financing must be structured as a cash-out refinance.

How Does A Delayed Financing Mortgage Work?

Delayed financing gives you the power of a cash offer while also allowing you to get a mortgage on a home.

In a transaction that involves delayed financing, the home buyer makes a cash offer on the home, which is often more favorable to sellers. After paying cash for the home, the borrower applies for a cash-out refinance to receive a return of most of the money they used to pay for the home. Instead of using a mortgage to purchase the home, you’re getting a mortgage after you buy it to essentially recover a portion of the money you spent.

Remember, though, that this is still a loan, and you’ll still eventually pay for the home – it’s just over a longer period of time. You’ll still need to apply for the mortgage loan, supply the required documentation and pay back the loan. Once you refinance, you’ll pay a monthly mortgage payment, with interest, on the loan.

Types Of Loans And Delayed Financing

Delayed financing is usually only offered on conventional and jumbo loans. Loans made pursuant to Federal Housing Administration (FHA loans) and Department of Veterans Affairs programs are not eligible for delayed financing. That’s because those are non-conforming loans that Fannie Mae and Freddie Mac do not purchase.

When Is Delayed Financing Used?

Some instances in which delayed financing may be used include:

  • If you need to make an all-cash offer to make a competitive offer amid a bidding war.
  • If you don’t want to – or can’t – wait the 30 – 60 days it may take to get through the mortgage process. This often happens when buying a short sale or foreclosure.
  • If you have enough money saved to do so but want to avoid having little to no savings long term.
  • If you’re a real estate investor who wants to stay more liquid to buy more properties.
  • If you’re in one of these situations, make sure you weigh the pros and cons of this type of home buying strategy.

Get approved to see what you can afford.

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The Pros And Cons Of Delayed Financing

Delayed financing can be a great option in a competitive market, but it can also be a gamble. Knowing the risk and reward is an important part of deciding if this is the right option for you.

One of the biggest advantages of delayed financing is that it can give home buyers the upper hand when it comes to getting an offer accepted. Cash offers are often preferable because sellers don’t have to worry whether the buyer will get financing, nor do they have to wait the 30 – 60 days needed for the mortgage process. But there are other advantages, too.

Pro: Delayed Financing Restores Your Liquidity

This is one of the main reasons home buyers seek delayed financing. A young buyer may have put every last dollar they had into buying a home and is in a precarious financial situation with no cash reserves. They may need to replace money they withdrew from retirement savings. They won’t be able to furnish their new home. For them, successfully completing delayed financing will restore a sense of financial normality.

For an investor, cash is key to quickly taking advantage of opportunities that arise. With cash, they can keep buying up diamonds-in-the-rough and making repairs.

Pro: You Don’t Have To Wait 6 Months

In fact, you must do the refinance within 6 months of purchasing the home. Typically, a cash-out refinance requires you to be on the title for 6 months. Delayed financing is an exception to the rule.

Pro: You May Be Able To Get Ahead Of Some Appraisal Requirements

Using cash to purchase the home may allow you to bypass certain mortgage lender requirements. For example, you could purchase a home that may not pass inspection and then bring it up to code by the time you refinance, qualifying the home for the mortgage.

Con: You May Deplete Your Savings

One of the obvious disadvantages of delayed financing is that you have to pay a large sum of money upfront. This could leave you with a depleted savings account or have you strapped for cash for months. Along with this issue, make sure you consider a few others.

Con: You Won’t Get All Your Cash Back

While you’re applying for what to you seems like a first mortgage, to your lender, it’s more akin to a cash-out refinance. And when you refinance, you must leave some equity in the home. How much depends on the type of mortgage you’re applying for and what you plan to do with the property.

Are There Risks To Delayed Financing?

As with everything in life, delayed financing has some risks you should consider before deciding on taking this route to homeownership.

Risk: You Might Not Get Approved For The Loan

Solution: Get preapproved.

There are never any guarantees, when you apply, that you’ll ultimately get a loan, or that a loan will be offered on favorable terms, with affordable monthly mortgage payments.

If you have excellent credit, you’ll probably anticipate having no problems getting approved. But credit markets can freeze, the housing market can chill, and interest rates can climb fast in the face of global events. The biggest threat of the three on the horizon is rising interest rates.

Higher interest rates will affect your monthly mortgage payments. If you’re an investor looking to sell as soon as possible, that might not matter much, but if you’re spending your last dollar to buy a home, the risk is more substantial.

To get an idea of where you stand with lenders, apply for preapproval before making the all-cash purchase. Rocket Mortgage verifies your financial information and may result in a Verified Approval Letter, which may be enough to sway your seller to accept your mortgage-backed offer.

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Risk: You’ll Assume The Market Risks Of Waiting

Solution: Don’t overextend yourself as a home buyer or a real estate investor.

Easier said than done as housing prices continue to rise; housing inventory remains low, and many buyers are simply desperate for a new home. But as always, there is a risk that – if you fail to act quickly enough – the home could suddenly be worth much less.

This risk is far more pronounced for house flippers, whose returns on investment are based on current market values. But for these reasons, flippers would be wise to pad their repair expenses by a fixed percentage and rely on conservative profit estimates.

Home buyers may fear a drop in home value when home prices are so high, but as long as they can afford their monthly payment, they can feel reassured (for now, anyway) that housing inventory is still pretty low in the U.S., a fact that is a problem for home buyers but a boon to homeowners.

Short-term volatility in real estate prices should not affect this long-term investment. If you need to move during a buyer’s market, consider keeping the house as an investment property and renting it out. You’ll continue to build equity, but someone else will be paying the mortgage.

Risk: Your Appraisal May Come Up Short

Solution: Factor in that risk when assessing affordability and just how much of the cash you’ll need back.

The home appraisal required for the new mortgage loan could come back lower than what you paid for the home. This could be a consequence of a general market cooling, an underestimation of how much it will cost to bring the home to livability or simply an overenthusiastic forecast of how much homes in that area would be selling for by the time the home was ready for the market.

The home appraisal required for the new mortgage loan could come back lower than what you paid for the home.

That means you’ll have to absorb the difference between what you paid and what the lender receives as the appraised value.

The good news is that the lender may be willing to consider more recent comparables than those used by the appraiser or other proof that the appraisal value was too low. The bad news? A conservative lender may simply use the lower appraisal value and you’ll have to part with more cash than you expected.

Is Delayed Financing Easier To Get Than An Upfront Mortgage?

Delayed financing doesn’t exempt you from any of the reporting requirements of applying for a mortgage. It just means you’re applying after you’ve taken the risk of putting all your cash in the home.

A delayed finance loan requires the same documentation, including proof that you paid cash as well as proof of the source of the cash. If you received gift funds to purchase the home, you’ll need to provide a gift letter explaining that the funds received won’t be reimbursed with proceeds from the new loan.

The Bottom Line: Delayed Financing Refills Your Drained Pockets

If you wonder how you’ll ever be able to cope with making an all-cash offer, if it comes to that, know that loans are available to help you regain normalcy once the sale is over. Delayed financing can give you the power of a cash offer while still allowing you to use a mortgage to finance a home purchase. It can also be a great option for home buyers in a competitive seller’s market.

Are you ready to start your home search with a mortgage approval? Apply online now. We’re here whether your mortgage-financed or all-cash offer is accepted.

Get approved to see what you can afford.

Rocket Mortgage® lets you do it all online.

NMLS #3030

Miranda Crace

The Rocket Homes blog is here to bring you all you need to know about buying, selling and making the most of your home. Whether you’re thinking about becoming a homeowner, selling your current home or looking to keep your place in tip-top shape, our writers and freelancers bring their experience and expertise to meet you right where you are.