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When sellers are juggling multiple purchase offers, they are more likely to accept a cash bid over a financed one because there’s a greater chance the all-cash transaction will close faster. There’s no paperwork to fill out, and the buyer doesn’t have to wait for a lender to approve their mortgage loan.
As a result, some buyers who depend on financing lose out on their dream homes once a cash buyer waltzes in and makes an offer. If you’re tired of watching cash buyers win every bidding war, it’s time to consider delayed financing.
What Is Delayed Financing?
Delayed financing allows you to get a mortgage after you’ve closed on a home you paid for with cash.
Traditionally, a home buyer takes out a loan and receives cash from a mortgage lender to purchase the home. With delayed financing, a home buyer pays for the home with cash, and soon after they close on the home, they take out a mortgage loan to recover at least a portion of the money they paid upfront.
Why Buy a Home With Delayed Financing?
Buying a home with delayed financing may seem counterintuitive, but there are situations when it can be helpful.
- Make a cash offer: In a hypercompetitive market, a cash offer is often the more attractive and stronger offer. With an all-cash deal, you and the seller won’t have to worry about a loan being delayed or denied.
- Buy a fixer-upper: Because mortgage lenders usually don’t offer mortgages for uninhabitable homes, buyers frequently purchase these properties with cash and apply for a mortgage once the home is rehabbed enough to qualify for a loan.
- Buy a short sale or foreclosure: Real estate investors looking to buy investment properties at a discount usually bargain hunt at foreclosures or short sales. Lenders typically only accept all-cash offers for these properties. Owners can apply for mortgages once their properties meet the loan’s property standards.
- Downsizers: Homeowners looking to downsize may use the cash they have saved up or the proceeds from the sale of their home to cover the costs of their new, smaller home. If they become strapped for cash after the purchase, they can use delayed financing to help cover their cost of living.
How Does Delayed Financing Work?
The first step is to buy a house with cash. Once you become the home’s legal owner, you can apply for a mortgage to recover the money you used to purchase the home.
Depending on the home’s condition, you may need to make repairs before you can qualify for lender financing. After you’ve closed on the refinance loan and reclaimed your funds, the mortgage on your property will work like a traditional mortgage loan.
Delayed Financing Eligibility
In general, a borrower’s only options for delayed financing are conventional loans or jumbo loans. Borrowers cannot obtain delayed financing through the U.S. Department of Agriculture (USDA), Federal Housing Administration (FHA) or Department of Veterans Affairs (VA).
Fannie Mae’s eligibility requirements for delayed financing include the following provisions:
- The original purchase must be an arm’s length transaction (there is no prior relationship between you and the seller, and each of you is acting in your best interest)
- Proof that the purchase was not made with mortgage financing
- Proof of the source of funds (such as bank statements)
- The loan amount cannot exceed your initial investment
- The property must be free of liens
The Pros and Cons of Delayed Financing
There are several advantages to delayed financing, but it also has some drawbacks.
Sellers and real estate agents will look favorably on all-cash offers because they know there will likely be fewer obstacles to closing on schedule.
If you or the seller are in a hurry to close, buying with cash means you can close as soon as the title search comes back.
If you buy a home with a mortgage loan and want to refinance soon after, you’ll have to wait at least 6 months before applying. With delayed financing, you can refi right away.
Interest rates on delayed financing loans are usually slightly higher than mortgage rates on other refinancing options.
As with any loan, approval isn’t guaranteed.
Coming up with enough cash to buy a home can be challenging, and your money will be tied up in the house until your refi goes through.
Cash Rules Everything Around Me
With delayed financing, you can use the power of cash to buy a home and take advantage of a mortgage later on.
Though delayed financing might mean paying a slightly higher interest rate than if you took out a mortgage before you purchased the home, it’s a small price to pay for the buying power a cash offer can deliver.
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The Short Version
- Delayed financing allows you to get a mortgage after you’ve closed on a home you paid for with cash
- Interest rates on delayed financing loans are usually slightly higher than mortgage rates on other refinancing options
- With an all-cash deal, you and the seller won’t have to worry about a loan being delayed or denied
Fannie Mae. “What is required for a delayed financing exception?” Retrieved July 2022 from https://selling-guide.fanniemae.com/Eligibility/Mortgage-Eligibility/Loan-Purpose-/COR/1033001981/What-are-the-requirements-for-a-delayed-financing-exception.htm