How It Works:
- Buy the Home with Cash: You purchase the property outright without taking a loan.
- Refinance Shortly After Closing: Typically within 6 months of the purchase, you apply for a cash-out refinance.
- Get Your Money Back: The lender reimburses you for the amount you paid in cash (up to the purchase price or appraised value, whichever is lower), turning the equity into a loan.
Why Do Buyers Use Delayed Financing?
- Competitive Advantage: Cash offers are attractive to sellers, especially in competitive markets.
- Quick Closing: Eliminates the waiting period for traditional loan approval.
- Liquidity: You free up cash for other investments or opportunities after closing.
- Avoid Tying Up Capital: Great for investors who want to reuse their funds quickly.
Requirements for Delayed Financing:
- Proof of Cash Purchase: You’ll need to show documentation, such as the closing statement or HUD-1, proving you paid cash.
- Property Must Be in Your Name: The title must be clear and in your name (or an eligible entity, like an LLC for investment properties).
- Loan-to-Value (LTV) Ratio: Most lenders allow up to 70-80% of the home’s value in a refinance.
- No Liens: The property must be free of any liens when you apply for refinancing.
- Source of Funds: Some lenders require proof that the cash used for purchase was not borrowed.
Pros of Delayed Financing:
- Retain the benefits of a cash purchase without depleting your liquidity.
- Potentially secure better mortgage terms due to the lower risk for lenders.
- Allows you to make cash offers in competitive markets.
Cons of Delayed Financing:
- Interest rates for cash-out refinances may be slightly higher than traditional purchase loans.
- Closing costs and fees are incurred twice (once for purchase and again for refinancing).
- Some lenders may have stricter guidelines for these transactions.
Who Benefits Most?
- Investors: Who want to flip or rent out properties and keep their cash flowing.
- Homebuyers in Hot Markets: Where cash offers often win bidding wars.
- Buyers Seeking Bargains: Like foreclosures or short sales that may require fast, cash-only deals.
- This can be a game-changer in competitive markets or for buyers with strong cash reserves but who want flexibility.