Despite interest rates tripling over the recent historic lows, real estate is still hot, with housing prices still on the rise. With housing inventory falling short of demand, we are in a seller’s market and are likely to remain there until at least 2033.
In a seller’s market like this, it’s hard for buyers to win the battle of multiple offers. There are techniques that we can use to help buyers. Today, we will be discussing “Delayed Financing” in detail. What is it? Why is it advantageous? Finally, what is the process for this program?
What is Delayed Financing?
Delayed financing is a strategy that enables homebuyers to purchase a home without the need for traditional mortgage financing at the time of the initial offer, making their offer more appealing to sellers. The buyer pays cash for a home at closing, then refinances immediately afterward under special underwriting rules. These rules allow the buyer to replenish some of the cash used to purchase the home.
Why is Delayed Financing Advantageous?
Winning a Battle of Offers
Cash buyers are always the best. For example, you’re selling your single-family home, listed at $350,000. Because of the seller’s market conditions, you might have 10 or more buyers offering to purchase your home.
The best 2 offers are:
John and Molly offer $375,000 with a 40-day close, FHA financing, and an FHA-imposed appraisal rider.
Lance and Rita offer $370,000 with a 15-day close, paying cash, and no appraisal rider.
In this circumstance, the cash offer will usually win over the one that needs a home loan.
What’s an Appraisal Rider, and Why Is It Important?
An appraisal rider allows an “out” for the buyer if the home doesn’t appraise for the contract price. Lenders will provide loans based on either the contract price or the appraised value, whichever is lower. If the home does not appraise at the contract price, the buyer must come up with additional cash, which isn’t always available. Most sellers will be aware of this.
An appraisal rider is a good tool for borrowers. However, in a seller’s market, it’s not appealing for sellers looking for the best and easiest deal, and things don’t look to be changing in the foreseeable future.
Normal Cash-Out Refinance Guidelines
Standard conventional cash-out guidelines allow a buyer to pull out cash from a home 6 months after purchase. However, delayed financing allows for an exception to the 6 month “seasoning” rule. This allows the buyer to apply for a cash-out refinance immediately after closing. It is important to remember that the cash-out limitation of 80% of the home’s appraised value still applies.
Opportunity Costs To Consider
The average home prices in different areas range from $250,000 to $350,000. If you’re considering making a cash offer, it can greatly enhance your appeal as a buyer. However, it’s important to note that using a large amount of cash from your checking account or investments comes with certain trade-offs. These trade-offs involve the potential benefits or opportunities you might miss out on by allocating those funds toward purchasing a home.
Fortunately, there are other options available to buyers who need to gather the necessary cash. These alternatives include utilizing gift funds, obtaining personal loans, or accessing lines of credit like a HELOC, which can help you pool together the required funds without incurring the opportunity cost associated with using your existing cash reserves or investments.
The Delayed Financing Process
The best process to purchase a home using delayed financing would be as follows:
1. Speak with a mortgage lender. It is important to speak with a mortgage lender about this option before buying your home. Audit trails and documentation are needed as you pay for the home to make the home loan application go smoothly.
2. Get the desired home under contract. Cash is always king. Offering to pay cash for your home gives you a huge leg up on other competing buyers. If the source of funds has to be moved from one source to another, make sure to keep good records of these transactions.
3. Close on the purchase of your new home. Since you are paying cash, the closing package will be minimal. Keep the ALTA or HUD-1 documents from the settlement because your lender will need them.
4. Apply for a cash-out refinance on your new house. This is why step #1 is so important – you need a lender familiar with your situation and plan. Your mortgage lender will help you gather all the necessary documents and process your application. They will order an appraisal, title, and any other necessary documents.
Once documents are received, your file is then underwritten as a cash-out refinance with a delayed financing exception.
5. Close on the refinance to put the cash back into your account. After you sign the closing package, which will be longer than the purchase package, you will get your funds within 3 days. If the subject property is owner-occupied, you must wait 3 business days before receiving funds. For investment properties, you will receive funds immediately.
Buying a home using delayed financing is a great way to buy a home in this seller’s market. Paying cash for the home helps ensure you stay competitive in this market. Once you get the home you want, you can get the home loan immediately after to replenish the cash used.