Deferred financing: an uncommon refinancing option for cash buyers

There are definite advantages to paying cash for a house. Did you know that paying cash instead of getting a mortgage could help you win a bidding war when buying a new home? You may even be able to negotiate a lower price on the house if you pay cash. After all, cash on hand is a sure thing, and mortgage approval isn’t always a sure thing.

On the other hand, however, mortgage interest rates are particularly low right now. Data Freddie Mac shows the average interest rate for a 30-year fixed rate mortgage in November 2018 was 4.87% with 0.5 prepaid interest points. Prepaid interest points involve paying some interest up front in order to get a better mortgage rate.

Twenty years ago, homebuyers were looking for a 6.94% interest rate bundle with more than one point prepaid, on average, for the same mortgage product. So why not use a mortgage to buy your home and find another use for your savings? What if you invested that money? What if you had major renovations in mind for your new home?

The good news is, you can get the best of both worlds with deferred financing: a cash-out refinancing option for recent cash buyers.

What is deferred financing?

In a delayed finance transaction, you can immediately withdraw money from a property to cover the purchase price and closing costs of a property you previously purchased in cash. . This allows you to have the advantage of being a cash buyer and give sellers the chance to know the deal will go through, while also giving you the option of securing a mortgage soon after in order to avoid having all of your savings tied up in your home.

You can think of deferred financing as a way to give yourself the negotiating advantage that comes with paying cash for the home, while still giving you the long-term financial flexibility that comes with paying monthly mortgage payments instead of you. make “home”. poor.”

How long do you have to wait to refinance?

If you are doing a deferred finance transaction on a property that you have purchased within the last 6 months, you are allowed to withdraw money immediately without any waiting period.

Under normal circumstances, if you bought a home with a mortgage instead of cash, you must be on the title for at least 6 months before you can withdraw money and refinance your home, so deferred financing is a notable exception.

When would you use deferred financing?

So now that you understand what deferred financing is, you might wonder why you would choose it over more common financing options, like getting a mortgage upfront and sticking to it or doing a cash refinance by. the following.

Well, besides being able to withdraw cash at home without waiting for seasoning, here are some other reasons why it might be a good option. Let’s briefly review the pros and cons.

Benefits:

  • A mortgage may not be possible at the time of purchase. Trying to buy foreclosures and short sales can complicate the mortgage process and sometimes make it more difficult to get approved for financing.
  • When buying investment property, you may not want to pay on a mortgage until it is time to rent the property. Once you’re ready to buy another property, deferred financing can free up the money you spent on the first investment property, so you can buy another property or use the money in another way.
  • You might run into unexpected debt after buying a home with cash, or you might just need more cash. Either of these scenarios would be difficult to resolve if you were spending all of your money on a new home, but deferred financing can help.
  • You could be a real estate investor who needs to lighten your tax burden. If you buy and sell a lot of homes, you may want to consult a tax advisor to see how deferred financing can benefit you. As an example, you can often deduct mortgage interest from your taxes.

The inconvenients:

  • You need a lot of money up front to buy a house because you won’t get the mortgage up front. This can be a challenge if you don’t have a lot of available assets.
  • Additional documents are required to obtain a loan with deferred financing. In addition to the usual mortgage documentation you would need regarding income, assets, and credit, you need a few more things. We’ll cover them below so you can be prepared.
  • This is only offered on conventional and jumbo loans. At a minimum, you must have a median FICO® Score of 620 or more, among other qualifications.

Am I eligible for deferred funding?

There are a few conditions that must be met in order for you to benefit from deferred financing:

  • Your new loan amount cannot be more than the total of what you paid for the house, including the purchase price, closing costs, prepaid fees, and points.
  • Your original purchase was to be what is called an “arm’s length transaction”. This means that you cannot be related or have a personal relationship with the seller. For example, you can’t buy a house with cash from your parents, boss, or friend and then get deferred financing.
  • You must provide proof that you paid in cash, such as your closing disclosure, settlement documents, or registered trust deed stating that no mortgage was used to secure the property.
  • You must share the documentation of the source of the funds you used to purchase the house.
    • If you are using savings from your employment income or from an unsecured loan such as a personal loan, you will need to share the documentation of those transactions.
    • If you have a loan secured by an asset other than the new property (a Home Equity Line of Credit, or HELOC, on another home), you must show that the money you withdrew was used to repay or repay. the mortgage on that other property and not paying for the purchase of the new home.
  • If you have received funds for the cash purchase of your new property, you cannot reimburse the donor with the proceeds you will get from deferred financing.

Keep in mind that all of these requirements can vary depending on the type of loan product you are looking for and the lender you are working with.

Why might my deferred financing fail?

There are a lot of requirements and, as you can imagine, sometimes things don’t work out perfectly and your funding ends up failing. There are two main reasons why deferred finance loans fail:

  1. Documentation issues: There are a lot of documentation requirements for delayed funding. If you don’t have everything you need, you’ll have to wait at least 6 months from the date you purchased the property to perform a typical withdrawal refinance.
  2. Assessment issues: The house is appraised when you buy it. When you start your deferred finance loan, it will need to be re-evaluated. If the home is valued for less than the price you paid, you will need to find a different financing option or absorb the difference.

If you are interested in deferred financing, this is definitely something to learn and consider. Paying cash can help. Just make sure you meet all the conditions for deferred financing if you plan to do so.

Do you think you might be eligible for deferred funding now? Fill in some basic information or talk to one of our mortgage experts at (800) 785-4788 to get started!

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About Nicole Harmon

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