What is Delayed Mortgage Financing?

Delayed financing (or more technically, a “delayed financing exception”) is the term used when a homeowner arranges conventional mortgage financing after having acquired property within the prior six months without any mortgage financing initially in place.

The most common example of delayed financing is an all-cash purchase transaction where the homeowner wants to recoup some or all of the purchase funds using a cash-out refinance immediately or shortly after purchasing the home. Another example would be when a personal loan (or some other type of financing that is not secured by the property being financed) is used to purchase a home and subsequently needs mortgage financing to pay back those funds.

What is the difference between a delayed financing mortgage and a standard cash-out refinance?

In today’s competitive real estate market, sellers prefer the relative certainty of an all cash purchase. This has forced many buyers who would prefer to finance their home purchase with a mortgage to become cash buyers instead. Their strategy is to buy the home with cash and then arrange conventional mortgage financing after purchasing the home.

But there’s a problem. Fannie Mae and Freddie Mac are the agencies that set underwriting guidelines for most conventional home loans. Under their rules, a cash-out refinance is not permitted within six months of a homeowner’s acquisition of the home. Because this guideline does not accommodate a transaction where someone buys a home in an all cash purchase and wants to finance the home shortly afterward, a carve-out was created to address the specialized nature of this situation. Therefore, a delayed financing mortgage loan is a category of cash out refinance used to provide financing to a cash buyer shortly after their home purchase.

How does delayed financing work?

As previously noted, delayed financing is simply the process of obtaining a cash-out refinance on a home purchased within the last six months that was not financed with a mortgage loan at the time of purchase. The process for a delayed financing mortgage is exactly the same as a typical cash-out refinance in that the homeowner has to qualify according to the guidelines set forth by Fannie Mae and/or Freddie Mac. This includes qualifying based on credit, employment, income, and debt to income ratio. Because of the special nature of delayed financing, there are additional guidelines and requirements for this program to be utilized.

What are the borrower qualification guidelines for delayed mortgages?

Arms length transaction

Fannie Mae requires that “the original purchase transaction was an arms-length transaction”. This means that there was no personal relationship between the buyer and seller. As an example, if the seller was the parent of the buyer, the buyer would not be eligible for delayed financing because that would not be considered an arms-length relationship.

No Mortgage financing to purchase the property

Delayed financing does not work if the property was purchased using mortgage financing. It’s important to clarify that the guideline is referring here to a mortgage loan secured by the subject property – that is, the home the delayed financing is being used for. It is permitted to use a mortgage loan secured by a different property, such as a home equity loan on another property owned by the buyer. An unsecured personal loan, 401(k) loan, or other loan not secured by the subject property is also acceptable.

Documentation requirements for meeting this guideline involve providing a copy of the settlement statement from the original purchase of the home to show that no mortgage financing was used. This can typically be found among the closing documents from the purchase. In addition, a title search must verify that there is no existing lien on the property.

Document the source of funds used to purchase the property

With the delayed financing program, the homeowner must document the source(s) of all funds used for the original purchase of the home. When a buyer elects to pay cash upfront, an asset statement for all accounts from which purchase funds were obtained must be provided. This is required to verify the buyer had the financial liquidity to purchase the home.

If the buyer chose to arrange financing for funds used for the initial property purchase (as outlined above), the homeowner must document the terms of that financing. Additionally, the delayed financing loan must repay those funds first. If the delayed financing loan amount is sufficient to pay the prior financing in full, the remaining funds can be disbursed to the homeowner. If the delayed financing funds are not sufficient to repay the financed funds, any remaining balance and payment must be calculated into the homeowner’s debt to income ratio calculation.

It’s worth noting that proceeds from the delayed financing loan can not be used to repay gift funds used to purchase the property.

Loan amount and appraised value

The maximum loan amount available under delayed financing is set by Fannie Mae/Freddie Mac. According to their guidelines, the amount cannot exceed “the actual 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”. This is limited by the maximum loan-to-value ratio for a cash-out refinance. For a primary residence, that limit is usually 80% of the property value (which is the lesser of the original sales price or appraised value of the home). For you real estate investors, investment property cash-out refinances are limited to 65% of the appraised value.

Consult an expert!

If you need delayed financing on a home, it is a great idea to consult an experienced loan officer before purchasing the home. Making the right moves at the time of purchase can make obtaining the delayed financing mortgage much easier. Most mortgage companies offer delayed financing so be sure to compare proposals from trustworthy lenders. At GoNoCost Mortgage, we can often provide delayed financing using our no closing cost program. We’d love to hear from you!