Delayed Financing: How It Works For All-Cash Home Buyers

In a competitive housing market, you may need to find ways to get your offer accepted that go beyond making an offer at or above the asking price. For example, you could theoretically make a cash offer, which means the seller will walk away with your money and no lender will need to be involved. Since a cash purchase can deplete your cash reserves and leave you feeling financially stressed, cash buyers may be able to take advantage of a delayed financing option that helps them recapture some of the money they’ve spent.

Let’s take a closer look at what delayed financing is, how delayed financing works, its pros and cons, and who could benefit from this type of financing.

What Is Delayed Financing?

Delayed financing occurs when a homeowner takes out a mortgage after purchasing their home in cash. Under this scenario, you’ll make a cash-only offer on a home and later apply for a loan that serves a purpose similar to a cash-out refinance in that it will free up a large portion of the cash you put into buying the property.

The typical route to buying a home is to apply for a mortgage after having a purchase offer on a home accepted. But today’s competitive market is causing some homeowners to consider making an all-cash offer to boost their chances of getting their offer accepted.

Making an all-cash offer can be pretty draining on your savings, however. To combat this, you might consider delayed financing, which allows a cash buyer to reclaim some of the equity they put into the home when they bought it for cash. This reclaiming of equity happens by way of what’s essentially a cash-out refinance performed immediately (no more than 6 months) after buying the home. Technically speaking, though, it’s not a refinance since you didn’t have a prior mortgage on the home but paid for the home in cash. Rather, delayed financing involves a regular mortgage that you take out after buying the home instead of prior to the home purchase transaction.

You might consider delayed financing for primary residences, second homes and investment properties.

When Is Delayed Financing Used?

Here are some situations where delayed financing can make sense:

• If you’re in a bidding war on a home and need to make an all-cash offer to gain an advantage over other bidders
• If you’re not willing to wait the amount of time – usually 30 to 60 days – that’ll be necessary to complete the home buying process with a traditional mortgage (For example, you may need to move faster when buying a short sale or a home that’s been through a foreclosure.)
• If you have enough money saved to pay in cash but want to avoid having little to no savings long term
• If you’re a real estate investor who wants to keep liquid assets on hand for the purpose of buying more properties

Traditionally, house flippers are the ones who’ve most commonly bought houses in cash. That’s because house flippers are often buying homes through short sales and from financial institutions that are selling homes they’ve acquired through foreclosure. For house flippers, unlike regular buyers, delayed financing is a relatively normal part of doing business.

In 2020, though, when interest rates were at historic lows, an unusual number of traditional buyers began making cash offers to have a chance at buying a home amid unprecedented bidding wars. Suddenly, you had more all-cash buyers interested in delayed financing.

Eligibility Requirements For Delayed Financing

Borrowers must typically apply for delayed financing within 6 months of closing on a home, and they can usually apply immediately after purchasing the home. As with any type of mortgage loan, the lender will need to review your income, assets and credit. In addition, you’ll need to show proof of the transaction and the source of the cash used for the original purchase.

Fannie Mae requires lenders to conform to its rules for delayed financing if lenders want Fannie Mae to purchase their mortgages after origination. These delayed financing rules include the following:

The loan amount can’t exceed more than the documented amount of the borrower’s initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points on the new mortgage loan. For example, if you bought a house for $350,000, you couldn’t then take out a loan larger than that amount via delayed financing.

• You can have no liens on the property.
• The sale must have been an arms-length transaction, meaning you can’t purchase the home from a relative or have any kind of personal relationship with the seller. This measure is intended to prevent various types of tax avoidance or mortgage fraud.
• An appraisal must be obtained when starting the delayed financing loan.
• You must be able to prove you paid cash for the property.

How Does A Delayed Financing Mortgage Work?

In a transaction that involves delayed financing, the home buyer makes a cash offer on the home, and that offer – because it’s in cash – is often more favorable to sellers. After paying cash for the home, the borrower applies for a mortgage – structured similar to a cash-out refinance – that allows them to receive a return of most of the money they used to pay for the home. Instead of using a mortgage to purchase the home, you’re getting a mortgage after you buy it to recover a portion of the money you spent upfront.

Remember, though, that this is still a loan, and you’ll still have to pay it back – just over a longer period of time. You’ll still need to apply for the mortgage loan, supply the required documentation and repay the loan through monthly mortgage payments that include interest.

Types Of Loans And Delayed Financing

Delayed financing is usually only offered on certain loans, as you can see in the chart below.

Loans borrowed through FHA and VA programs aren’t eligible for delayed financing because those are government-backed loans rather than loans backed by a private lender, which is the case for both conforming conventional loans and jumbo loans (which are also conventional).

However, like FHA loans and VA loans, jumbo loans are non-conforming loans that aren’t eligible for purchase by Fannie Mae or Freddie Mac because they don’t conform to the guidelines that will allow them to be sold to the two government-sponsored enterprises (GSEs).  

The Pros And Cons Of Delayed Financing

Delayed financing can be a great option in a competitive market, but it can also be a gamble. Knowing the risks and rewards is an important part of deciding if this is the right option for you.

Pros

• Your offer may stand out to a seller. Cash offers are often preferable because sellers don’t have to worry about whether the buyer will secure financing. They also won’t have to wait the 30 – 60 days typically needed to complete the mortgage process.
• Delayed financing restores your liquidity. A young buyer may have put every last dollar they had into their new home, leaving them in a precarious financial situation with no cash reserves. For them, successfully completing delayed financing will restore a sense of financial normality.
• Investors can buy more quickly. Cash is key to quickly taking advantage of opportunities that arise. With cash, real estate investors can keep buying up diamonds-in-the-rough and making repairs.
• You don’t have to wait 6 months to take out the loan. In fact, you must secure the loan within 6 months of purchasing the home. Typically, a traditional cash-out refinance requires you to be on the title for at least 6 months before refinancing, but delayed financing is different. Make sure your lender knows you’re pursuing delayed financing.
• You may be able to get ahead of some appraisal requirements. Using cash to purchase the home may allow you to bypass certain mortgage lender requirements. For example, you could purchase a home that may not pass inspection and then bring it up to code by the time you decide to pursue delayed financing, qualifying the home for the mortgage.

Cons

• You may deplete your savings. One disadvantage of delayed financing is that you have to pay a large sum of money upfront. This could leave you with a depleted savings account or strapped for cash for months.
• You likely won’t get all your cash back. While you’re technically applying for a first mortgage, your lender may view it as a cash-out refinance. When you refinance, you must leave some equity in the home, the amount of which depends on the type of mortgage you’re applying for and what you plan to do with the property.
• You might not get approved for the loan. There’s no guarantee you’ll ultimately get a loan or a loan with favorable terms, such as affordable monthly mortgage payments.
• Interest rates could go up between buying and financing. Higher interest rates will affect your monthly mortgage payments. If you’re spending your last dollar to buy a home, this can be a substantial risk.
• You’ll assume the market risks of waiting. The returns on investment that house flippers and investors receive are based on current home values. If you fail to act quickly enough, the home could suddenly be worth much less than the original purchase price.
• Your appraisal may come up short. The home appraisal required for the new mortgage loan could come back lower than the amount you paid for the home. That means you’ll have to absorb the difference between the money you paid and the appraised value that the appraiser shares with the lender.

To get an idea of where you stand with lenders, apply for preapproval before making the all-cash purchase.

Rocket Mortgage^® verifies your financial information, which may result in a Verified Approval Letter. This might be enough to convince your seller to accept a mortgage-backed offer.

How To Get Delayed Financing

Delayed financing doesn’t exempt you from any of the reporting requirements that come with applying for a mortgage. It just allows you to buy a house with cash, then get a mortgage afterward.

To get started on a delayed financing mortgage, you should:

1. Talk it over with a financial advisor and real estate agent, both of whom can help assess the risks involved and whether your situation is right for this type of transaction.
2. Make sure you meet all the eligibility requirements of a mortgage and confirm the house has a clean title with no liens.
3. Submit a mortgage application within 6 months of purchasing your new home.

A delayed finance loan requires the same documentation as any mortgage, including, as already mentioned, proof that you paid cash as well as proof of the source of the cash. If you received gift funds to purchase the home, you’ll need to provide a gift letter explaining that the funds received won’t be reimbursed with proceeds from the new loan.

The Bottom Line

Delayed financing can give you the power of a cash offer while still allowing you to use a mortgage to finance a home purchase. It can be a great option for home buyers in a competitive seller’s market, and it can allow investors to purchase real estate in quick fashion.

Just be mindful of the risks involved and remember that it’s best to discuss your situation with a financial professional and real estate pro before pursuing a delayed financing mortgage.

Connect with an agent today to walk through your options for delayed financing.