Delayed Financing - an Overview

[Robert Sepulveda]

Just wanted to share an overview I wrote out on Delayed financing. Feel free to discuss and ask questions. I see it comes up a lot, so thought this would help:

Delayed Financing - Investors can Cash out of your investment property 1 day after purchase

OVERVIEW

In a competitive housing market with historically low inventory, many Real Estate Investors, are paying cash for their investment properties. Be it a flip or rental property, paying cash to differentiate yourself in a competitive market can mean the difference between a good deal, or a marginal and maybe even overpriced deal. Paying all cash makes a huge difference in leveraging the offer and terms you want. Sellers know there's no questionable loan needed to close the sale of their home and escrows can close in as little as 14 days if so desired.

However, once an investor buys a property with their hard earned cash - or even with syndicated funds from other investors or family- lenders have typically required 12 months seasoning before you could refinance out your cash. Some cases allowed refinance after 6 months. This ties up your cash for a long time and means many investors can only do one cash deal a year. But there's an alternative.

Delayed Financing is a conventional mortgage refinance of an investment property that was paid for with all cash. Technically, you can request a refinance 1 day after the sale closes on your purchase. However, you can refinance within 6 months after the close of your purchase under these guidelines.

QUALIFICATIONS

We're speaking primarily of Fannie Mae's delayed financing guidelines, so your typical Investment Property Cash-Out Refinance matrix applies. This means you can cash out 75% of the value of your home for a single unit property or 70% of the value for a 2-4 unit property. It must have been an arms length transaction to qualify, so don't buy from friends or family and expect to be able to use this program. And all the sources of funds must be able to be documented.

Sources of Funds - Typically cash is king and any cash coming from a bank account, qualified retirement account that allows for a real estate purchase (typically a self-directed IRA), or borrowed 401k funds. You can mix and match funds from any of these and other accounted sources and qualify to cash-out under this program. But can you borrow anything other than your own funds (401k, IRA) and still qualify? The answer is yes.

Borrowed funds are allowed with some caveats. The primary restriction being that there can not be any lien applied or stipulated on or to the subject property. So if you borrow from friend's or family, for example, they cannot be secured by any type of deed to the property. Tie it up contractually as you may, but keep in mind, that the conditions of the agreement/note can affect your qualification.

Any institutional source of funds is allowed as well. Borrow from your credit cards, someone else's line of credit, cash out from another property can all be used to purchase your investment property with ALL CASH and qualify for Delayed Financing. Just know that borrowed funds MUST be paid down first at closing to secure the creditor.

HOW MUCH CAN I CASH OUT

Technically, you can cash out up to 100% of what you paid for the property. What determines what you paid is the closing statement of your purchase transaction (i.e. HUD-1). This document also confirms that no mortgages were used in the purchase and itemizes all of your closing costs. These closing costs can also be calculated in your total purchase cost that you can recoup. However, you're limited to that 75% or 70% loan to value respectively.

What determines this value. The appraisal of course. But which one? If you are applying immediately after the close of your purchase, the original appraisal you acquired for the purchase is used. If you didn't use one (since you paid cash and were confident in the value), then a new one will be ordered. This is where the word "Technically" in the previous paragraph comes in. Most appraisals apply for 60 or 90 days. Most lenders will require you use the previous appraisal no matter what. Some will allow a new appraisal to be ordered if you show you made significant improvements to the value of the property before applying for the cash-out. So technically, if you got a great deal when you paid cash, your appraised value may be higher than you paid for the property. If it's say 25% higher than you paid, then you can recoup 100% of the total purchase costs.

This works very well for many investors who typically buy fixer uppers to rehab and rent for cash flow. Many times, if you buy shrewdly, you can recoup the majority, if not all, of your funds you used to buy your investment property. This then frees up your cash to move on to the next property and repeat. So, if building a portfolio of property is your game, Delayed Financing could be the answer to your prayers in speeding up that process without complicating your offers and leverage earned by using ALL CASH.