What is Delayed Financing with a Cash Out Refinance?

Delayed financing is when you buy a home with cash and get a mortgage afterward using a cash out refinance. Delayed financing can help you enjoy the advantages of paying cash for a house without leaving that cash locked inside the equity of your home after the sale closes.

Why do homebuyers choose delayed financing?

There are advantages to buying a house with cash. It can make the process simpler and faster because you don’t need to get a mortgage. It can make your offer more attractive to the seller for the same reasons, which can help you get your bid accepted especially when you are competing with other buyers. Paying cash might help you negotiate a lower sale price too.

Buying a home with cash does have a disadvantage however. It converts your cash into home equity, which is less easy to spend or less "liquid" than cash. For this reason, some homebuyers consider using delayed financing.

How does delayed financing work?

The first thing you need when you are interested in delayed financing is the cash to buy the home. One way you can get this cash is when you have an existing home which you sell before you purchase your new home – especially when your new home is less expensive than the home you sold. You can use savings or cash from other assets to help you buy the home too.

You don’t have to wait when you want to use delayed financing. Unlike other cash out refinances, for which lenders can require you to wait six to twelve months after buying the home before you apply, you buy a home one day and apply for a mortgage the next with delayed financing.

You will need to complete an application, provide documents, and meet the lender’s credit, income, and financial requirements to get your mortgage approved. You’ll pay closing costs and you’ll pay interest on the money you borrow.

You will also need to decide how much of the home’s value you want to finance. Lenders often will give you a mortgage for up to 80% of the home’s value. For example if you buy a home for $300,000 in cash, you might be able to get a mortgage for up to $240,000.

You are not required to borrow this full amount. You may decide that financing half the home’s value makes sense for you and get a mortgage for $150,000. A smaller mortgage can help you lower your monthly payment and pay less interest over the life of the loan too.

Finally, it can often take between 30 to 60 days to get your delayed financing approved. Make sure you can manage your expenses until the mortgage closes and you get your cash.

What are the requirements for delayed financing?

Fannie Mae has requirements for delayed financing. The original home purchase must be an arms-length transaction, which means you and the seller each act independently and in your own self-interests. When you buy a home from a family member or friend, it can be difficult to establish the sale was at arms-length.

You need to document that no mortgage was used to help finance the purchase of the house. You’ll also need to document the sources of the money you used to buy the house. You can use money from loans such as a HELOC to buy a house which you intend to delay finance, but you must use the cash from the financing to pay off or pay down this loan.

There cannot be any liens against the home. The new loan amount cannot be more than the amount of the initial purchase price including closing costs, fees, and points. Finally, you need to use a conventional loan for delayed refinancing. You cannot use an FHA or VA loan.