Delayed Financing – Cash out for Investment Properties
Often times, it benefits an investor to acquire a new property with a cash transaction. Rather than obtaining a mortgage initially, offering cash can bring about several benefits. For one, in a competitive market, sellers will often view a cash offer more favorably than a financed offer with all other terms being equal. Cash allows for a faster settlement time, less risk (no appraisal contingencies, no possibility of lender delays, etc), and can be the difference between obtaining a property and missing out on it in a multi-offer situation or a scenario where a seller needs an extremely fast closing.
The downside to cash offers are many – with mortgage rates low and often deductible, the combination of foregoing deductible debt while reducing liquidity is often not very appealing. If an investor buys cash and wishes to later obtain a mortgage, they run into multiple sets of closing costs, and many lenders will have applicants wait 6 months before pulling cash from a recently acquired property. That’s where delayed financing comes in.
Delayed financing is a resource for investors and other cash buyers to obtain cash and a mortgage on a property recently acquired in a cash purchase. Unlike a traditional conventional loan, delayed financing has no seasoning period on a property’s purchase date before being able to access equity using an appraised/market value rather than the original sales price of a property.
Scenario 1 – traditional financing
Purchase price of $150,000, cash on a property worth $175,000. Under a traditional conventional loan, the buyer would have to wait 6 months before accessing cash on the $175,000 value, potentially having very little liquidity after the purchase. If they accessed the equity sooner, they’d be capped at 70% Loan to value, or just $105,000.
Scenario 2 – delayed financing
Using the same purchase price & market value with the delayed financing provision, an investor could immediately access cash in the property up to 75% of the property value, or $131,250. The result is new debt for deduction purposes and access to more than 20% more cash than would have been available with a standard conventional loan.
To qualify for delayed financing, the property owner must meet all of the following guidelines:
- The original purchase must have been an arms length transaction
- Borrowers must qualify under Fannie Mae borrower eligibility guidelines, and have purchased the property as a natural person, in an eligible trust, eligible land trust, or 100% owner of an LLC or partnership
- Property must have no liens and documentation must be presented to show original purchase involved no financing was used to purchase the property
- Sources of funds for purchase money of the property must be documented
- If funds used for original purchase were from an unsecured loan or secured debt on another property (for example, a HELOC on another property), cash out proceeds must reimburse that debt
- Maximum loan amount cannot exceed the borrower’s original purchase price PLUS acquisition costs (title/attorney fees) AND closing costs on the new cash-out mortgage
To complete a delayed financing transaction, it’s important to work with a lender and loan officer that has experience with the process. Many lenders have overlays that prevent delayed financing loans from being funded, and working with an inexperienced loan officer can cause a ton of headache because of the unique documentation requirements.
There are many benefits to carrying a mortgage on a property and keeping liquidity high. With delayed financing, anyone buying investment properties OR a primary residence/second home with cash can regain liquidity after making a cash purchase.
The JM Loans team has a great deal of experience with delayed financing, and can usually get the entire loan done from application to check-in-your-hand within 3 weeks. If you have questions on delayed financing, give John a call at 484.680.4852 or ask an expert here