Many investors, and even sometimes individuals buying property for their own use, don’t have the ability to wait for the 30 days or more that it can take to get a mortgage to buy a property. In that event, they often pay cash for the home and take their cash back out at a later time to free up funds for further investment activity or other needs with delayed financing.
Typically this would be considered a “cash-out” refinance and under standard guidelines, that is not allowed until one year after the purchase of the home. However, there is an exception, referred to as “delayed financing” to allow buyers to take their cash out more quickly.
These rules allow for the buyer to apply for a cash-out refinance immediately (or anytime within the following 6 months) after closing on the home for cash.
With this in mind, here are 5 things you should know when considering delayed financing.
#1 Loan Amount
The new loan amount cannot be more than the original amount invested in the property plus the financing of closing costs and prepaid expenses. The allowed loan amount is also subject to the maximum loan-to-value ratio for the cash out transaction based on the current appraised value. In other words, if the home is purchased for $100,000 cash and the closing costs to refinance are $5000, the new loan amount will be limited to $105,000, even if the new appraised value is $150,000 and a 75% loan-to-value ratio, or $112,000 loan ($150,000 @75%) would otherwise be allowed on this type of transaction.
#2 Source of Funds Verification
The lender, in most cases, will still want to verify the “source” of the funds used to make the original purchase. Therefore all of the same rules apply with regard to allowable sources of cash. If the funds originally used to buy the home cannot be “sourced” or verified (i.e. the cash was under the mattress), then the cash-out refinance will not be permitted. If the funds were borrowed, that will also be unacceptable as there can be no liens on the property. However, you MAY use funds from a 401k plan. Also, unlike standard purchase transactions, gift funds cannot be used to purchase the home.
#3 Copy of HUD Settlement
The lender will also usually request a copy of the HUD settlement statement from the original purchase to verify that the sale actually took place and there are no liens reflected on the HUD.
#4 Arm’s Length Transaction Verification
The lender will want to verify that that the original purchase was an “arm’s length transaction”, meaning it was not purchased from a related party, such as a parent, brother, sister or other family member. A purchase from a party with an “interest” in the transaction, such as a real estate agent, appraiser or title agent is also prohibited.
#5 Loan-to-Value Ratio
The loan-to-value ratio will be consistent with what would typically be allowed for a cash-out refinance under the same scenario, considering type of property, use of property, etc. In other words, the loan-to-value for an investment condo would probably be different than that allowed for a primary home, single family residence – just as those differences apply to a typical cash-out refinance. However, see loan amount limitations discussed above.
So, if you plan the purchase correctly, following the guidelines above, you should be able to buy your property with cash and then take the funds back out to be used anytime within the following 6 months. This can be a great tool for property investors!