Across the United States, anyone who has recently tried to buy a home knows the struggle of housing shortages. Inventory is tight, prices are nationally high, and competition is fierce. Cash buyers are pushing out bidders relying on loans, prompting buyers to find creative ways to submit the strongest offers.
What is delayed financing?
Delayed financing reflects the normal process of getting a loan and then closing on the home purchase. In a delayed financing scenario, buyers purchase a home first and then set up the mortgage second – after they have moved into the home. They still need to find the funds to pay for the home in cash (or, in some cases, using equity or other financial assets). But they can then reimburse themselves with mortgage funds.
Essentially, delayed financing allows buyers to take advantage of the benefits of being all-cash buyers while also reaping the benefits of using a mortgage to keep a greater portion of their liquid capital.
How does delayed financing work?
The delayed financing process starts with a homebuyer gathering cash to buy a home outright. How they do this is up to them: they may choose to use savings or sell other assets, like stocks or real estate.
The next step – securing the delayed financing – is quite similar to applying for any loan. The borrower needs to provide the same financial information and proof of employment. They will also need to undergo a credit check. As with any financing, borrowers must maintain their creditworthiness and employment status between the time they buy the home and when they obtain their mortgage.
Eligibility requirements for delayed financing
There are some additional steps in the delayed mortgage. It must comply with certain criteria. For example, Fannie Mae outlines guidelines for delayed financing, including:
- The original purchase was a “between parties” transaction, meaning you did not have a personal relationship with the seller.
- You can document the source of the cash (for example, bank statements or personal loan information) used to purchase the property.
- You do not obtain a mortgage higher than the total purchase price, closing costs, points, and fees.
- There are no liens on the property.
Who is delayed financing best for?
Alan Silvenbinder, executive director of sales at Bank of America, says, “Delayed financing is an option, not a necessity, and can be a significant benefit for the right customers.”
Who is the “right customer”? Clearly, someone with means – who has financial reserves in the form of liquid or hard cash assets. You don’t necessarily need to sell stocks or bonds to get cash ready. Buyers can leverage their investments for delayed financing, Silvenbinder notes. For instance, Merrill, the wealth management arm of Bank of America, allows customers to obtain a secured line of credit using their securities. This line of credit can be funded the next day.
Silvenbinder says, “We have clients who buy a million-dollar home using securities-based loans, then return to us for delayed financing for a percentage of the purchase price. They pay down their line of credit and get a fixed rate under the same terms as if they’d done a cash-out refinance. And they don’t incur the additional fees they would have with a cash-out refinance.”
In this scenario, there is no capital gains tax because the assets weren’t actually sold, and therefore no profits are realized. Borrowing against assets can be a better strategy than liquidating them entirely, which could incur substantial taxes.
A common example, according to Silvenbinder, is an heir who inherits stocks and gifts significant shares. These stocks often have a low cost basis (the original value of the asset used to calculate any capital gain upon sale). “Once sold at current market value, that capital gain becomes a taxable event. If they use that money to buy a home, we can actually do delayed financing to recapture the cash. However, that may end up costing them more,” says Silvenbinder. “In most cases, there are other ways to avoid or minimize those tax consequences, and an accountant or attorney can advise them on that.”
In
the end, deferred financing is best for those who can provide cash to make it happen, and who have financial experts in their corner to guide them through the process.
Advantages and Disadvantages of Deferred Financing
Advantages
- Offers cash offer advantages: More attractive to the seller, faster closing.
- No six-month waiting period to access the funds, unlike cash-out refinancing.
- Receive a regular mortgage (usually cheaper than cash-out refinancing).
Disadvantages
- Interest rates may rise if financing is delayed after the purchase period.
- Financing may be unavailable if issues arise with the home after purchase.
- Temptation to spend mortgage funds on other things instead of compensating oneself or recovering assets.
Important Considerations When Using Deferred Financing
If you want to buy a home with cash and then secure a loan, there are some key things you should know. Here’s what to keep in mind:
Competitiveness of Your Offer
Deferred financing can help buyers in tight markets successfully compete for homes, as they use cash, and sellers love cash buyers. Silenbinder says, “When sellers look at 15 offers on their home, you want to present the most attractive offer. That’s why you see more people using deferred financing.”
Scheduling Your Financing
Unlike cash-out refinancing, there is no six-month waiting period in deferred financing, which is a requirement before a lender will write a loan on a newly purchased property. This means buyers can quickly recover their cash and secure a fixed rate.
Your Loan Costs
There are no cash-out refinancing fees, which can range from 3 percent to 6 percent of the borrowed capital and are often higher than those associated with a regular mortgage. However, buyers who choose deferred financing should be prepared for all closing costs related to starting a new mortgage loan.
Risk of Rising Interest Rates
If buyers wait too long to secure a loan after purchasing a home with deferred financing, they may face higher interest rates. In the current high-rate environment, this is likely. Ben Dunbar, managing partner at Gerber Kawasaki Wealth and Investment Management in Santa Monica, California, says, “When you’re talking about larger loans, a half-point or a quarter-point increase in interest can be significant.”
Home Quality Considerations
Cash buyers — including those planning to use deferred financing — avoid some lender requirements. For example, they can buy a home that doesn’t pass inspection, then fix it within 60 days and still qualify for their mortgage. This is common for people in some parts of the country, especially on the coasts and in vacation spots, according to Silenbinder. However, purchasing a home that is unqualified for financing due to its condition can turn into a financial disaster. Dunbar says, “It’s a bit concerning that people buy a home with significant damage or structural issues for cash, hoping to get a loan later. Unless they hire experts to inspect the home, they don’t really know what they’re buying.” In this scenario, it’s essential to hire specialized inspectors (for example, in construction or electrical work) to conduct a thorough assessment. The worst-case scenario is buying a property, discovering problems are worse than you thought, and then pouring more cash into fixing them. Worse yet, if you can’t afford the repairs, you may not receive the deferred financing and keep your money tied up in the home.
Title Insurance
If
You chose delayed financing, make sure to obtain title research and purchase title insurance. Although cash buyers are not required to buy this coverage, it is a good idea, as it can help protect against any undiscovered liens. Another good reason: peace of mind knowing that in the rare case there is a title defect, your investment in the home is protected.
How to Apply for Delayed Financing
Talk to your financial advisor, accountant, and real estate agent to assess the risks and benefits. Delayed cash offer can help you stand out in a crowded market, but there may be consequences if prices rise or the home faces major issues. There may also be tax implications depending on how you obtained the cash.
Make sure to meet all eligibility requirements for a loan, including: no close relationship or friendship with the seller, documenting the sources of cash used to purchase the home, not borrowing more than the purchase price of the home, and ensuring the home has a clear title.
Complete a loan application with the lender within six months after purchasing the home. Be prepared to include details about your finances, work history, and undergo a credit check.
Conclusion on Delayed Financing
Delayed financing can offer many benefits. This type of arrangement isn’t suitable for everyone, but even if you’re in a position to buy a home with cash and then obtain a loan, having the cash on hand can be appealing to some people.
Selinbinder says, “One risk – and this is natural – is that you want to make this home your own. You want to buy furniture and things like that. So, there is a risk when additional credit is offered to make changes to the home,” says Selinbinder. “We advise clients to understand their debt-to-income ratio and their credit report.”
Source: https://www.aol.com/delayed-financing-works-224746144.html
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