Delayed Financing Question

[Aaron W.]

I am trying to get a better understanding of delayed financing and how to complete one correctly. From my understanding, you purchase the property in cash and ensure the repairs/rehab costs are included in the HUD-1 statement. After closing, you apply for financing on the home.

1. How does the HUD-1 form play into applying for financing?

2. Are the repairs/rehab costs in the HUD-1 itemized or just a line item?

3. Where does the appraisal come into play?

4. Do the rehab/repairs have to be completed before applying for delayed financing?

5. What else am I missing?

Thank your for all your insight!

[Annchen Knodt]

I think I can help with some of your questions - I've gone through an application for delayed financing so am familiar with the process. My application ending up falling through because the funds for purchase were sourced from my partnership's bank account and I was applying for the loan in my name - hoping to help others avoid this issue! So, first of all, definitely be sure you are able to document where the cash for the purchase is coming from, and that it's purely YOUR cash if YOU are the one applying for the loan (a HELOC on your residence is ok). This blog post has lots of great tips for succeeding with delayed financing (and the comments are helpful also)

But to answer your questions:

1. You will give the HUD form to your lender when you apply for DF, and that's how they will know how much money you put in up front. The amount you can get for DF is limited to this amount or 75% of appraised value (whichever is LOWER), which is why having the rehab costs on the HUD to get included in this calculation is a really good move!

2. I think the rehab funds will usually just be a line item (see blog post linked above for an example)

3. Your lender will also order an appraisal since it gets used as mentioned in #1 above. Ideally 75% of the appraised value is greater than the amount of cash you put in for purchase (which remember can include the rehab if you put it on the HUD, and closing costs too!), so that the amount of cash you can get out won't be limited by the appraisal.

4. I'm not sure if rehab "has to" be completed before you apply for DF, but it's usually in your best interest because it will boost the appraised value which is obviously desirable (see #3). If you've landed a REALLY awesome BRRR deal and earned a large amount of equity from your rehab (say you buy it for $40k, rehab for $10k, and ARV is $100k), then you may want to wait the 6 month seasoning period until you can do a normal cash-out refinance where you are NOT restricted by the amount of money you put in initially as you are with DF (in the example, with DF you would be restricted to $50k cash out = $40k purchase + $10k rehab, even though 75% of your ARV is $75k… after the 6mo seasoning you could get that full $75k though!) I've heard that some lenders will do that even before the 6mo seasoning, you just have to call a lot of banks.

5. And don't forget my point about sourcing your funds!  Also, I've been looking into another DF recently and lots of lenders are telling me that it's very hard to do that right now bc of the pandemic's effects on the investment lending markets.  Everyone's been telling me to just wait the 6 months … I haven't called all that many lenders though because at this point I'm getting pretty close to the 6 months anyway.

HTH!