Buying an investment property all-cash rather than getting a mortgage has definite perks. Paying cash can help you negotiate the best deal on an investment property or help you win a bidding war. If you want to buy a fixer-upper and are unable to arrange conventional mortgage financing, cash is your best friend.
However, if you want to get the best of both worlds, you might want to try out delayed financing. But how does delayed financing work and is it a good option for real estate investors?
What Is Delayed Financing?
Delayed financing is a conventional financing method that allows you to purchase a property all-cash and immediately do a cash-out refinance to mortgage the property. Unlike a standard cash-out refinance, you won’t have to wait for 6 months from the closing of an all-cash purchase before refinancing.
In a delayed financing transaction, your cash is only temporarily tied up in buying the property. Shortly thereafter, you’ll be able to recover a huge chunk of the purchase price and closing costs by refinancing. This allows you to enjoy the same benefits as cash buyers while enabling you to take a mortgage immediately after and avoid tying up all your saving in your investment property.
In most cases, delayed financing is used in buying multi-million dollar properties with investment loans that aren’t backed by Fannie Mae or the like. This means that they aren’t subject to their loan limits and rules. Nevertheless, there’s Fannie Mae delayed financing available for borrowers who want to buy modestly priced properties below the local loan limits. The loan limits vary with location.
However, it’s important to note that delayed financing for an investment property is a little different from delayed financing used on a primary residence. The maximum loan-to-value (LTV) ratio is usually lower for investment properties and second homes.
Delayed Financing Requirements
Many borrower qualification guidelines for delayed financing (such as debt to income ratio and credit score) are similar to those of a standard cash-out refinance. However, there is an additional set of requirements that you have to meet to qualify for delayed financing. Most of them actually relate to the initial property purchase and may vary depending on the lender and loan type. They include:
- The initial property purchase has to be an arm’s length transaction. This means that the buyer and the seller should be unrelated and the sale wasn’t influenced by any party. For instance, you should not purchase a property from a friend, relative, or colleague.
- To be eligible for a delayed financing mortgage, you also have to provide proof that the investment property was bought with cash and is not financed by any loans secured by the property. You’ll be required to provide closing documents such as a settlement statement and grant deed.
- You are required to provide documentation that verifies the source of funds used to purchase the property in cash.
- If you used a home equity loan or HELOC to purchase the property, the proceeds from the delayed financing mortgage must first be used to pay off or pay down those loans. Moreover, the cash you take out can’t be used to repay a gift used for the cash purchase.
- The investment property must be purchased free of any outstanding mortgages or liens.
Advantages of Delayed Financing for Real Estate Investors
Why would you choose delayed financing over other investment property financing options like getting one of the various investment property loans or doing a cash-out refinance after taking a mortgage loan? Here are some key reasons you should consider this financing option:
1. Property sellers favor cash buyers
When it comes to buying an investment property, cash is king. Cash buyers will often have an edge over other buyers. You’ll be able to get a better purchase price which translates into a better return on investment. If you are buying an investment property in a hot real estate market, paying cash can give you a competitive advantage.
2. Access equity in your investment property sooner
Unlike a standard cash-out refinance, you don’t have to wait for 6 months before title seasoning. This means that real estate investors will be able to access equity in the property sooner.
3. It can be used to buy a property that won’t qualify for mortgage financing
Sometimes it may be hard to qualify for mortgage financing if you are buying an investment property that’s in poor condition like a fixer-upper. You can use delayed financing to purchase and rehab such a property.
4. You regain financial liquidity
Disadvantages of Delayed Financing for Real Estate Investors
1. You need to gather a lot of cash upfront
The main downside of delayed financing is that you need lots of cash upfront to make the purchase. For this reason, it mostly works for people who have the financial muscle to purchase a property outright.
2. Higher mortgage rates
Another disadvantage of delayed financing programs is that they usually charge higher mortgage rates and fees relative to a standard cash-out refinance. This is due to the specialized nature of a delayed financing mortgage and not all lenders offer it. So it may take time to find a delayed financing lender.
The Bottom Line
Delayed financing enables you to do a cash-out refinance immediately after purchasing a property with cash. This gives real estate investors cash power while still being able to finance the mortgage over time. Investors should weigh the advantages of this financing option against the potential cost savings of waiting for a longer period and performing a standard cash–out refinance. If you decide to go for delayed financing, just make sure that you are meeting all the stipulations. You should also contact multiple lenders and compare proposals so that you find one that offers delayed financing at the best rates.