If you’re currently in the market to buy a home, a lack of housing inventory can make the process expensive. And the expanded presence of cash buyers in the market will also make it even more difficult for homebuyers bringing traditional financing to the table. Cash offers are often advantageous for buyers and desirable to sellers, but it’s not always feasible to sink a large amount of cash into the purchase. Delayed financing, however, allows buyers to make a cash offer without permanently reducing their liquidity. Here’s how it works.
If you’re financing a home, a financial advisor can help you create a financial plan that accounts for a mortgage.
What Is Delayed Financing?
Delayed financing means that the buyer purchases a home with cash and then takes out a mortgage within six months of buying the home. Most of the cash spent on the home is returned to them through a cash-out refinance. In other words, they retain their liquidity and take on a mortgage.
How Does Delayed Financing Work?
To use delayed financing, you must have a large sum of cash for your offer. Therefore, buyers who want this capability may look to their savings or the sale of other assets to amass the money needed to purchase the home outright.
The next step looks similar to someone seeking a home loan. You’ll typically provide necessary financial documents and proof of employment for your application to buy your desired home through delayed financing. The lender will also run your credit to establish your creditworthiness.
Keep in mind that you’ll need to remain employed and preserve good credit after buying the home to pass the loan prequalification for a mortgage. Additionally, you’ll need to demonstrate that you don’t have a close personal relationship (friend or family member) with the seller. Delayed financing is also not possible if the property has a tax lien against it.
Reasons to Use Delayed Financing
If you’re concerned about making your bid stand out from others, a cash offer can do that for you. This route will also let you bypass the expected length of time (30 to 60 days) that it takes to obtain a mortgage.
Delayed financing makes you nimble while still allowing you to pay for your home through a mortgage once you’ve made the purchase. You will retain your liquidity since your stockpile of cash comes back to you after you have your mortgage in place, which can then be saved or invested in something else – even your next property.
Pros and Cons of Delayed Financing
Pros
Delayed financing gives your bid more clout in a competitive housing market and you circumvent the time restriction of getting a mortgage. There are a few more pros to consider as well.
Is the home you’re looking at not up to code? With delayed financing, you can buy it first and then bring it up to code. Once you complete the work needed, you can obtain a mortgage as long as you apply within six months of purchase.
Suppose you’re having difficulty securing a mortgage because of your credit. In that case, delayed financing gives you the ability to purchase a home and the time to restore your credit before trying to get a mortgage. At the end of the process, you’ll have a mortgage in place and cash in hand again, and you can turn your eye to your next investment.
Note, delayed financing can purchase a primary residence, second home, or investment property.
Cons
Delayed financing requires that you have a sizable amount of money to begin with. Draining your finances through this process can leave you vulnerable to other financial pressures. Note that six months after your purchase and beyond, you will no longer be able to make use of delayed financing. Purchasing a home costs money, including the amount you’ll need to put down for the mortgage, so you won’t recover all of the funds you had going in. You might not qualify for a cash-out refinance.
Every mortgage necessitates an appraisal of the home. The appraisal could assess the property’s value as lower than what you purchased it for, and the mortgage would not cover the entirety of what you paid. You would have to absorb the cost, meaning the sum you get back from the cash-out refinance could be significantly lower than what you had going in.
Since mortgage interest rates vary over time, rates may be lower when you purchase but increase in the months afterward at the time of applying for a mortgage. Even a fraction of a percentage point could equal a more burdensome monthly payment.
Only conventional loans and jumbo loans allow for delayed financing. However, FHA and VA loans don’t. Remember, some lenders don’t offer delayed financing.
Qualifying for delayed financing requires more documentation than a mortgage, such as documents showing your source of funds and proof that the purchase of the home is with said funds. If the cash was a gift, a gift letter is usually required. It must state that the money will not be paid back through profits from the mortgage.
How to Apply for Delayed Financing
Applying for delayed financing is a multistep process that requires time and planning. Make sure you prepare with these three steps:
- Start by discussing the pros and cons with your tax professional or financial advisor, and real estate agent to determine if delayed financing is your best path forward. There are always risks and your taxes could be affected as well.
- Qualify by providing documentation showing where you got the funds for your purchase, making certain the home has a clear title, and proving that the seller is not a family member or friend.
- After purchasing the home, apply for a mortgage before six months elapse. Note that it is beneficial to compare lenders to find the best rate and terms.
Key Considerations: Delayed Financing
While cash offers aren’t necessarily the most usual in the market, especially for first-time homebuyers, delayed financing can be a serious option if you are downsizing. If you have paid off your mortgage, you may find yourself with access to cash through selling your home and utilizing some of your other assets.
Conversely, you may be a real estate investor looking to make a swift purchase without overpaying for your next property. Delayed financing lets you make a strong offer without ultimately tying up your liquidity.
The strengths of delayed financing are the speed and ease of your cash offer. With no lender approving a mortgage and no appraisal to hold up the process, the seller is looking at a shorter timeframe.
Instead of taking part in a deadlocked bidding war, your offer can become the most attractive option for a seller looking to make a quick decision without losing out on any of the value of their home.
Bottom Line
Delayed financing is not an option for everyone. Still, if you can put the cash together, you have the potential to cut through bidding wars. It also helps you avoid overpaying for the property. While delayed financing is not without risks, such as having trouble qualifying for a mortgage in time or receiving an appraisal well below the purchase price, it remains a powerful option for liquid buyers in a competitive market.
Tips for Using Delayed Financing
- Consider speaking with a financial advisor about the weighty decision of buying a home, as it can have significant financial implications. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Though you’ll initially be using cash, you’ll still end up with a mortgage. So, it’s helpful to know how much house you can afford.
- Financing a home goes well beyond paying the mortgage every month. You can calculate closing costs and down payments to make sure your mortgage fits your financial plan.
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