If you need to purchase a home quickly and have the money to buy with cash, but want to maintain financial liquidity for investments or other purposes, delayed financing may be perfect for your needs.
Delayed Financing: A Useful Option for Maintaining Cash
Delayed Financing 101
Delayed financing is not a type of loan products like an FHA loan, conventional loan, or jumbo loan. Instead, it’s a mortgage that is simply finalized in a different order.
With this loan, you buy the property first, using your own cash to make the purchase. Then you work with a lender to secure a mortgage on the property, essentially refilling your bank account (or investment account or whatever) with the money you brought in from the loan.
In many ways, it’s just like a typical mortgage. The only major difference is the order in which the mortgage is secured; the end result is the same.
Here’s an example of how it might work…
Suppose you purchased a property for $750,000 using your own cash. You took the money out of your savings account and used it to purchase the property. Next, you met with your lender and took out a mortgage against the property, securing a loan for roughly $700,000. This loan, like any other mortgage, is tied to the property. The property, in other words, is collateral. This simply means that if you fail to make payments, the lender has a legal right to foreclose and seize the property. Obviously this is rare, but using a house as collateral reduces overall risk to lenders, as they can recover some of their assets in an emergency. This safety net reduces risk and allows them to offer more generous terms, such as interest rates that would be much higher otherwise.
It really is as simple as that. There are a few slight differences, but it’s basically the mortgage process in a different order. With the usual process, you find a house, secure the loan, then make a purchase. With delayed financing, you find the house you want to buy, purchase with cash, then take out a loan.
Delayed Financing: The Three Simple Steps
Although each lender will have their own process for completing a delayed-financing mortgage, the process usually looks like this:
Step 1: Speak with a Lending Agent
Before purchasing a home, it’s best to speak with a lender about delayed financing. Make sure this is an option they offer, and ask about pre-approval and other speed that can help speed the process once you purchase.
Step 2: Find a Home You Want to Buy
The next step is to actively search for a property. This is similar to any other process, although you’ll want to make it clear to sellers and agents that you intend to purchase with delayed financing.
Step 3: Purchase the Property with Cash
Once you find a home to buy, the next step will be to make the purchase. In this case, you will simply use your own money to purchase the property.
Step 4: Secure Delayed Financing
Now is the unique step in the process. At this point, you already own the home, and you now take out a loan with the property listed as collateral.
The Benefits
All of this might seem like a waste of time. After all, if you can afford to purchase the home, why bother taking out a mortgage at all? Why not just own the property and not have any mortgage payments.
The benefits is that you can make fast purchases while maintaining “liquidity.”
With this option, you can make the purchase quickly. Instead of finding a home you wish to purchase, then going through the long process of finalizing a loan, then making the purchase, you can buy the property quickly. This allows you to stay competitive in the market and purchase desirable properties quickly.
But it still doesn’t answer the issue of taking out a loan even when you don’t need to. If you can purchase the home with cash, you can still maintain a competitive edge. Why bother if you already own the property?
This is where liquidity comes in.
The main reason that someone uses this option is to simply have cash on hand instead of locking their money into a property. When you own a property, which is certainly a good thing overall, you have a lot of personal net worth locked into the property. You really can’t access this net worth, as it’s not “liquid,” meaning it’s not quickly available to spend or transfer into cash.
Who Uses Delayed Financing?
While anyone can use delayed financing if they have the means, there are a two types of people who typically utilize these options.
Investors
The first type is investors. These professionals need to maintain liquid cash so they can take advantage of investment opportunities at a moment’s notice. Instead of locking their finances to a property, they instead use delayed financing so they can make other investments and have cash on hand for property repairs and maintenance.
Homeowners in Hot Markets
If you have experienced problems purchasing a home, delayed financing could be the right option. By using this financing option, you push the mortgage-approval process to after the purchase, not before. This can make your purchase offer more attractive and increase your chances of finally landing the home you desire. In a market where homes sell fast, it could be the key purchasing the home you need.
Whether you are a homeowner in a fast-paced market or an investor who want to maintain liquidity, delayed financing could be right for you. Contact our staff to learn more about delayed financing and what you can do to maintain a positive edge in a highly-competitive market.
