What Every Homebuyer Needs to Know About Delayed Financing
Delayed financing allows you to access your home’s capital immediately after you make a cash purchase.
Before 2011, any cash buyer that wanted to access the equity in their property had to wait six months. If, for example, you purchased a home with cash and two weeks later were hit with significant medical bills, you could not take out a loan against your home to pay for the issue. Or, more commonly, if you were an investor who purchased with cash, your funding would have to sit in the home for half a year before it could be utilized for another investment.
Now, however, you can use delayed financing to access the capital that is invested in your property. Best of all, it can be accessed almost immediately!
Delayed Financing Allows You to Utilize Your Investment
What is Delayed Financing?
Delayed financing, sometimes called cash-out refinancing, is when you take out a loan against a property that you own within the first six months of ownership. This type of financing is most commonly used by investors, but it can, in some situations, also be used by typical homeowners purchasing a primary or secondary home. It’s typically used by people who purchase a property outright, using cash instead of an initial loan.
Essentially, the investor in a property wants to access the equity, so they use the funding for other investments. Using the money from delayed financing, the property owner basically takes a cash-out refinance. They buy the property in cash, within six months take out a loan against the property.
There are a few important limits to delayed financing amounts. Essentially, you can borrow up to 70% of the property value or the amount you paid, whichever is lower.
First, you can only tap financing up to 70% of the property value. Let’s say you purchased a property that is worth $200,000. In this case, the limit that you can borrow in delayed financing is 70% of $200,000, or $140,000.
Unless the amount you paid for the property is less than $140,000…
The limit is also based on how much you paid. Let’s say you purchased a property that is worth $200,000 for a great deal of $110,000, which you paid for in cash. In this case, the limit would be $110,000 because this is lower than 70% of the property value.
Why Choose Delayed Financing?
Delayed financing has many advantages that investors find extremely beneficial. In most cases, sellers prefer buyers with cash, so operating the purchase with cash, then moving into financing, can make properties more available to you. You may be able to get a better price or, at the very least, have your cash bid accepted over loan-based transactions.
Cash transactions are particularly common among bank-held foreclosures, which present significant opportunities to investors. There can be lots of competition for these properties, so if you want to enter this market, cash may be required.
In some cases, delayed financing can also be an alternative to 203(k) loans from the FHA. 203(k) loans allow you to borrow for both the purchase and any necessary home improvements in one single loan and one single payment. However, this financing can come with significant fees, mortgage insurance, and other costs. Delayed financing can help you avoid these fees if you have the capital to make the initial purchase.
Delayed financing can also be used to update a home that is not currently sellable to a homebuyer. Buying the home and restoring it with your own funds, then taking delayed financing, allows you to purchase an investment property without chaining your funds to a single property.
This form of financing can also be used as an alternative to a reverse mortgage. Retirees can move into a new home with their own cash, then use delayed financing as a way to access money that would otherwise be locked to the new home.
Some buyers may find that purchasing with cash and using delayed financing is easier to complete compared to a mortgage loan. Trying to buy foreclosures or short sales with a typical mortgage can be complicated, but delayed financing can allow you to purchase the home and still utilize the capital.
It’s always possible to gain unexpected debt after purchasing a home. If this is the case, delayed financing could help pay for some of these expenses at a rate that could be lower than the newly-accrued debt load.
There is also that chance that real estate investors could ease their tax obligations by using cash purchases and delayed financing. However, with the 2018 tax-reform bill, it’s essential that you consult a professional tax expert before making any financial decisions motivated by tax purposes.
With Delayed Financing, Be Prepared for Documentation, New Appraisal
If you are looking to utilize delayed financing, be prepared for two important factors. First, you will need thorough documentation. Documentation issues are one of the top barriers to delayed financing; without it you may be unable to close the deal and you could be forced to wait six months and complete a typical cash-out refinance.
The property will also need a new appraisal. Yes, the home was probably appraised when you bought it, but you will need another appraisal when you seek delayed financing. If, for whatever reason, the property is appraised for a value lower than what you paid, you’ll have to find a different form of financing.
How Can You Use Delayed Financing?
Delayed financing is available now, and you only need to meet a few specific criteria to be eligible. First, you must have purchased with cash for an amount less than the value and the home must not have any liens against it.
You’ll have to show proof of the sale, which is a basic fraud-prevention measure. This can usually be completed by showing the lending agent your closing disclosure document. This document should demonstrate both the sale and that no liens exist.
Get the Information You Need on Delayed Financing
If you are interested in delayed financing, contact San Diego Purchase Loans for more information. We’ll make sure you understand the benefits of this program so you can make a confident decision on your investment.