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How Does Delayed Financing Work?

Lauren Nowacki5 MINUTE READ
May 26, 2021

With the number of listings dropping more than 40% in 1 year, the nation is experiencing one of the most competitive housing markets in history.

With such a low supply of properties for sale, home buyers are finding it hard to compete with other buyers, who are making astronomical 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.

Not everyone is willing to deplete their savings and become house rich and cash poor. Instead, some cash buyers use a strategy called delayed financing.

What’s Delayed Financing?

Delayed financing allows you to purchase a home with an upfront cash payment. Within 6 months of your closing date, you can then begin the process of a cash-out refinance, which allows you to take out a mortgage for the property and have your cash investment returned to you without associated fees of a routine cash-out refinance.

How Does Delayed Financing 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 buyer applies for a cash-out refinance to receive a return 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 most 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.

When Might Delayed Financing Be Used?

Some instances in which delayed financing may be used include when:

  • You need to make a competitive offer.
  • 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.
  • You have enough money saved to do so but want to avoid having little to no savings long term.
  • 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.

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.

Pros

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.

  • You don’t have to wait 6 months to do a cash-out refinance for delayed financing. 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.
  • Using cash to purchase the home may allow you to bypass certain 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.
  • You can use delayed financing for primary residences, second homes and investment properties.
  • If you can’t qualify for a mortgage at the time you want to purchase a home, you could purchase the home with cash and then take the necessary steps to improve your credit or financial profile within 6 months.

Cons

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.

  • You will not get back 100% of the money you used to purchase the home. You’ll need to leave some equity in the home.
  • The loan isn’t guaranteed. You’ll have to apply for the cash-out refinance, so there’s always the risk that you may not qualify.
  • The appraisal required for the new mortgage loan could come back lower than what you paid for the home, meaning the loan amount could come back much lower than what you paid. That means you’ll eat the difference in cost.
  • Since you may refinance up to 6 months after the purchase, you run the risk of getting a mortgage at a higher interest rate than was offered when you purchased the home.
  • This is only offered on conventional and jumbo loans. FHA and VA loans are not eligible for delayed financing.
  • Not all lenders offer delayed financing.
  • It could be more difficult to qualify for delayed financing as it requires additional documentation, including documentation showing where you got the money to purchase the home and proof that you paid cash for the home. 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.

How To Apply For Delayed Financing

You must apply for delayed financing within 6 months of closing, and you can 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.

There are also specific requirements for delayed financing, including:

  • The new loan cannot exceed the original purchase price.
  • There cannot be any liens found in the title search.
  • The sale must have been an arms-length transaction. That means you cannot purchase the home from a relative or have any kind of personal relationship with the seller.
  • A new appraisal must be obtained when starting the delayed financing loan.
  • No mortgage loan can be used to purchase the property.
  • Delayed financing must be structured as a cash-out refinance.

The Bottom Line On Delayed Financing

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 be a great option for home buyers in a competitive seller’s market.

To help you decide if delayed financing is the right option for you, first research today’s real estate trends in your area. While many markets across the country are extremely competitive right now, you may be able to find a home for sale in an area where competition isn’t so fierce. Delayed financing requires you to have a large sum of money available to use and live without for up to 6 months. If you’re not in that situation, consider other methods for standing out among other homebuyers, including having mortgage preapproval, offering above the asking price or putting down a strong earnest money deposit.

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Lauren Nowacki

Lauren Nowacki is a staff writer specializing in personal finance, homeownership and the mortgage industry. She has a B.A. in Communications and has worked as a writer and editor for various publications in Philadelphia, Chicago and Metro Detroit.