If you are trying to buy a home in a competitive market, you may find that a cash bid wins over any other bid. It’s true, cash is still king when it comes to buying a home. Some sellers are willing to take the cash bid that may be a little lower than the bidder that needs to secure financing.
Why is a cash bid so important? It’s because cash doesn’t have any stipulations. Mortgage financing has many stipulations, some of which can prevent you from buying the home. This means the seller can end up back at square one – looking for a buyer all over again.
If a cash buyer liquidates all of his assets to buy the home, though, that’s risky business. Suddenly your life savings is tied up in your home. What if the housing market crashes again? What if you can’t afford your mortgage payments and you lose the home? That’s a big risk to take.
That’s why some borrowers pay cash, but then turn around and get a mortgage later. This practice is known as delayed financing. It’s possible and it can work, but you should know what to consider.
You Can Refinance Right Away
The good news is that there isn’t a seasoning period. In other words, you don’t have to wait until you’ve owned the home for a long period of time before you can refinance. This is the case with cash-out refinances. Lenders require borrowers to wait at least six months before they refinance and tap into their home’s equity.
With delayed financing, it’s different. You can apply for the mortgage at any point after you close on the home. In general, you must meet the following requirements:
- The purchase transaction must have been an arm’s length transaction. This means that you don’t have a relationship with the seller whether you are related by blood or marriage.
- You can only borrow up to the purchase price of the home. Each lender will have a specific loan-to-value ratio that they allow.
- You must supply proof that you paid for the home in cash. You can do this with your Closing Statement.
- You must prove that you can afford the new loan. This means you must have a good credit score, decent debt ratio, and stable income.
You May Need to Fix the Home Up
Sometimes homes don’t pass the lender’s requirements. This may happen during the appraisal portion of the loan process. If you know the home has issues that would prevent it from passing an appraisal, you may pay cash for it now, fix it up, and then apply for delayed financing. You could then take the time and resources necessary to fix the home up again. Once it’s ready to pass an appraisal, you could apply for financing.
Keep in mind that during that time, the rates could increase, which could make getting the mortgage a little more difficult and/or more costly. Before you buy the home, get all of your ducks in a row. Make sure you know how you will fix up the home, if you will need contractors, and how you will pay for it. This way you can get the ball rolling and refinance the home as soon as possible before rates have a chance to increase.
You’ll Need to Prove How You Paid for the Home
It’s not enough to prove that you paid for the home in cash; you must prove how you paid cash for the home. In other words, lenders need to see your source of the money. Was it your employment income that you saved? Did you sell an asset? Did you cash in your stocks, bonds, and mutual funds?
However you earned the cash to pay for the home, you must provide documentation. The lender needs to see how you obtained the cash. Most importantly, they want to know if you used any proceeds from a loan to get the cash. For example, did you take out a home equity line of credit on your current home? Did you take out a personal loan?
Each of these factors will play a role in what you can afford to take out when you apply for delayed financing.
Pitfalls You May Face
There are certain risks that you face when you apply for delayed financing. The largest is the appraisal issue. If you wait too long to get an appraisal done or even if you have it done right away and the lender’s appraiser thinks the home is worth less than you paid for it, you may have an issue.
You may be able to just eat the difference, but that could hurt your net worth. If you had plans to take out the full amount and reimburse your accounts with the cash you liquated to buy the home, you could find yourself in a difficult financial position.
Also, if you can’t provide the documentation lenders need for delayed financing, you may be forced to conduct a cash-out refinance. This means you’ll have to wait at least 6 months to refinance the home and the amount you can take out will be limited to an estimated 80% of the home’s value.
Delayed financing is a great way to help you win the bid on a home in a competitive market, but it has its downsides. Make sure you know what you are getting yourself into before you take the plunge. You are taking a big chance by depleting your assets in the hopes that you’ll replenish them with the delayed financing program.