Many home buyers find themselves in situations where they want or need to pay cash for a home.
Maybe the home is in disrepair and not eligible for financing. Maybe it is offered below its true value and there are multiple competing offers. A quick-closing cash offer vastly increases the buyer’s chances of getting the home.
Whatever the reason, many of today’s buyers pay cash for homes. According to a recent study by housing data website RealtyTrac, 25% of all home sales do not involve a mortgage.
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Choosing when to purchase with cash — or get a mortgage
But that doesn’t mean these home buyers don’t qualify for a mortgage, or even that they don’t want one.
Many buyers do not wish to tie up all their cash in a single home. That limits their ability to accomplish other goals like purchasing more property or keeping cash reserves for an emergency.
In 2011, Fannie Mae came up with a solution for these types of cash buyers. It’s called the “Delayed Financing” rule and it allows home buyers to reimburse themselves up to 100% of their home purchase costs using standard cash-out refinance guidelines.
The rule applies to buyers who have purchased or are looking to purchase their primary residence, second home, or investment property.
6-month cash-out refinance restriction waived
Standard Fannie Mae rules state that a home buyer cannot be approved for a cash-out refinance on a property they purchased within the last six months.
But that requirement is waived if the buyer did not open any mortgage on the home they purchased.
This is why this rule is officially known as the Delayed Financing Exception – it is an exception to typical cash-out refinance rules.
Buyers who have owned a home longer than six months are eligible for cash-out financing whether or not they opened a loan initially. For buyers who purchased with cash more recently, the Delayed Financing mortgage is a fantastic tool.
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Who is eligible for cash home purchase reimbursem*nt?
Fannie Mae sets out very generous rules around who can qualify.
Individual home buyers as well as certain trusts, LLCs, and partnerships are eligible. They can be buying a primary residence, a second home, or an investment property they plan to rent out.
The other major requirement is that the buyer did not open any mortgage, lien, or financing of any type on the home that they purchased.
This does not exclude buyers who opened up a line of credit, cash-out mortgage, or another lien on a separate property.
For instance, a homeowner has $100,000 in equity in their primary home. She opens a home equity line of credit (HELOC) on her primary residence for $100,000 and uses that money to pay cash for an investment property for $100,000 in her neighborhood.
This buyer opens a Fannie Mae cash-out loan for a maximum of 75% of the initial purchase price. She then uses the proceeds from the new loan of $75,000, less closing costs, to pay off the HELOC.
Keep this in mind: a buyer must use proceeds from the new cash-out loan to pay off or pay down the HELOC or other loan used to buy the home.
Other sources from which a buyer can raise the cash to make the initial purchase are:
- Savings accounts
- Investment or retirement accounts
- Personal loans
- Sale of other assets such as a car or boat
- Any combination of the above
The applicant will have to supply documentation proving the source of funds for the initial cash payment. It is a good idea to gather corresponding bank statements, bills of sale, and loan settlement paperwork prior to applying for the new cash-out loan.
Maximum loan amount
One of the most advantageous features of the Delayed Financing program is that buyers can reimburse themselves up to 100% of the initial investment in the home.
This includes the purchase price, buyer fees, and even closing costs of the new loan.
This loophole comes about because the new cash-out maximum loan amount is based on the property’s current appraised value, not the original purchase price of the home. So if the buyer purchases a home for less than the market price, or does improvements, the home could be worth much more just months later.
Here’s an example. You buy a home that has some cosmetic issues. In good condition, the home is worth $300,000. But you purchase it for $220,000 and do some repairs and improvements.
Two months later, the home is worth $300,000. You could qualify for a loan of up to 75% of the current value based on a new appraisal, or $225,000. This amount covers the initial purchase price, plus extra purchase and/or loan fees.
Buyers who find and buy the right homes could turn into serial investors, continuing to free up their cash to buy more properties.
Just keep in mind that guidelines change when the loan applicant owns more than four financed properties. Click here to find out if you qualify for a cash-out loan if you own multiple properties.
The following is a quick look at maximum loan-to-value ratios per property and loan type.
Delayed Financing Loan Amount Maximums | ||
Property Type | Maximum LTV – Fixed Rate | Maximum LTV – Adjustable Rate |
1 unit Primary Residence | 80% | 75% |
2-4 unit Primary Residence | 75% | 65% |
1 unit Second Home | 75% | 65% |
1 Unit Investment Property | 75% | 65% |
2-4 Unit Investment Property | 70% | 60% |
Again, the above loan-to-value maximums are based on the property’s current appraised value, not on the original purchase price. If the property increases in value significantly, there’s a good chance the home buyer can reimburse all of their upfront home purchase costs with the new loan.
Check your mortgage rates. Start here (Mar 16th, 2024)
Delayed financing rule: An opportunity for home buyers
Buyers who can pay cash for a home have one more reason to do so. They know they are eligible to receive back some or all of their initially invested funds.
In many markets today, homes are on the market for hours and days, not weeks and months. Buyers need to make strong offers and deliver on the agreed terms. A cash home purchase lets them do just that.
This program is an opportunity for two circ*mstances: you are interested in reimbursing yourself after a recent home purchase, or you are considering paying cash for a home.
In either case, Delayed Financing guidelines are one more reason to buy your primary home or rental property without tying up all your cash.
Check your rates for a delayed financing mortgage. Start here (Mar 16th, 2024)
![Cash Home Purchase: Delayed Financing Rules [Chart] (2024)](data:image/png;base64,iVBORw0KGgoAAAANSUhEUgAAAAEAAAABCAQAAAC1HAwCAAAAC0lEQVR42mP8/h8AAvMB+NzmkbcAAAAASUVORK5CYII=)
