As homebuyers plunk down all cash to win houses, some of them might wonder how quickly they can convert that equity back into Benjamins. The answer? In what’s frequently called a “delayed mortgage,” they can get a cash-out refinance almost immediately, thanks to a little-known Fannie Mae program.
Pay cash, then get immediate cash-out refi
The delayed financing program allows all-cash homebuyers to refinance and take equity out as soon as they close on the home purchase. Before mid-2011, when the program went into effect, homebuyers had to wait at least six months before tapping home equity.
That’s good news for homebuyers in all-cash sales, which were a third of all purchases in the first quarter of 2014, up from the previous two years, according to the National Association of Realtors. And those are not all investors either, says the NAR. Many are retiring baby boomers trading down to more manageable homes and pocketing the difference when they do it. The delayed financing program gives them the option to take home even more cash while enjoying historically low interest rates on a conventional home loan.
5 things about the delayed financing program
- It lets you buy a home with cash, then do a cash-out refinance immediately.
- You have to show where the cash came from to buy the house.
- The purchase must be an arm’s-length transaction.
- You can get more cash if it’s a primary residence, and less if it’s a second residence or investment home.
- Many sellers favor cash offers, so the program bestows an advantage in hot markets.
“I’m seeing it more and more in the areas where the property market is really heating up,” says David Cary, a mortgage broker for C2 Financial Corp. who works in the California market. “It’s made a big difference to clients I work with because they don’t want all their money tied up in real estate, even for a short time.”
Delayed Refinancing 101
Despite no wait time, the program comes with rules:
- The sale must be arm’s length, meaning no parents selling to their children or business partners transacting with each other, Cary says.
- Homebuyers must prove where all the cash came from to buy the house, something that isn’t necessary during a regular refinance, says Pava Leyrer, director of training and implementation at Northern Mortgage Services in Grandville, Michigan.
- If the home was bought using money from a home equity line of credit on another house, the money from the cash-out refinance must first be used to pay down the HELOC debt.
- Gift funds used to buy the house cannot be paid back with the cash-out proceeds.
- There also cannot be any lien or loan financed directly against the property, such as a HELOC, Leyrer says.
Top 10 lenders January-March 2014
Ten lenders accounted for well over half of mortgage dollar volume in the first quarter of 2014. The traditional “big four” lenders are listed in boldface.
|Financial institution||Market share|
|Bank of America||5.4%|
|U.S. Bank Home Mortgage||3.4%|
Limits on money amounts
The program can be used for primary residences, second homes or investment properties up to the local conforming loan standards (typically $417,000).
But the amount of equity that can be pulled out depends on what the house will be used for, says Scott Sheldon, a senior loan officer for Sonoma County Mortgages in Santa Rosa, California.
- Owners of primary residences can borrow up to 70 percent of the home’s value.
- Investment properties and second homes are limited to 60 percent or less.
Borrowers also cannot have more than 10 financed properties to qualify for the delayed refinancing program, Sheldon says.
Why people use the delayed financing program
There are several reasons that homebuyers may use the delayed financing program instead of waiting the six months to tap equity:
- A property may be in such disrepair that a lender won’t underwrite it, Cary says. With this program, a homebuyer can buy the property, make quick repairs and take money out of it before six months elapse.
- The chain of buyers and sellers might have irreconcilable timing issues. One of Cary’s homebuyers used the program as he downsized from one place to another. “The buyer couldn’t close on his old home before buying the second residence and the seller wouldn’t wait until he closed,” Cary says. “So he used pretty much all the cash he had from retirement funds to buy it and then used this program to get it out.”
- It can be used as a tactical advantage in a hot market. Many sellers would rather accept cash offers over those with a financing contingency, sometimes even when the cash offer is lower. The program allows homebuyers to present a cash offer, then replenish their liquidity once the deal is done, Sheldon says.
- The program can act as a hedge against rising interest rates, if the buyer believes rates will increase in the six months after buying, Sheldon says.
Reasons to avoid the delayed financing program
The delayed financing program isn’t always easy to find. Even though Fannie Mae buys this type of loan, many lenders don’t offer it, Cary says. That means less competition on rates and terms.
“In my experience, the big four banks did not have this type of loan the last time I did it,” Cary says. “Some don’t want to get involved and others make it even more restrictive.”
Getting the cash out earlier also means you will get a higher rate, pay higher fees and deal with more paperwork to close the loan, says Sheldon.
“If you wait six months,” he says, “you can get the same product, except cheaper and easier.”
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