Back in a real estate market a long time ago and in a mortgage galaxy far, far away — otherwise known as 2009/2010 — some buyers needed to purchase a home with cash, then hope to refinance after they had the keys in hand. The reason for this? Bad credit? Nope. Extinction of stated income loans? Sorry, try again. The reason was often that the homes were not eligible for financing — many had been ravaged by the neglect of economic downturn. Plumbing was torn out, there were holes in the walls and a good number of the properties that came on the market through short sales, foreclosures and otherwise were just in various problematic states of disrepair. They could not pass the appraisal test for “as is” condition, and so buyers needed either a private money (“fix and flip”) loan or cold hard cash in order to make the purchase.
In response to market conditions, a guideline provision known as “delayed purchase financing,” or “delayed purchase” or “recoup of funds” was implemented. This allowed a homebuyer to get what was essentially a cash-out refinance shortly after buying a home with cash. Heretofore, it had not been possible to get a cash-out loan within the first six months of ownership — sort of an industry standard also aimed at preventing fraud. But with the volume of homes purchased “free and clear” out of necessity, the lending guidebook needed to adjust its sails to reality and create a finance option for buyers who ultimately desired to have a mortgage. The delayed purchase finance exception became reality.
Flash forward to 2021, and many of California housing markets are demanding the benefits of delayed purchase financing for an entirely different reason — fierce competition. Buyers today feel they are being forced to make cash offers to appear most attractive to sellers who have lots of choices. And in a world where certainty and speed are highly desirable, cash is king. I’m not kidding you when I say that houses worth $3MM or more routinely sell all-cash in our area. But at the end of that luxurious day, some of those buyers still hope to put a mortgage, at today’s low rates, on the property and recoup some of their cash investment. So how do they do it?
How Does Delayed Purchase Financing Work?
The question above can best be answered by saying that if you think of this transaction JUST LIKE a purchase money loan, you will be very near to the truth. That is, the income, assets and credit you’d need to qualify if you were buying and financing the home traditionally still all apply if you are doing delayed financing. But like with all things mortgage, there are a few exceptions, potential snags and special considerations…
When you buy traditionally, you have a down payment and a mortgage and the two amounts added together total your purchase price. But when you finance after purchase you’re just obtaining a mortgage and the “down payment” is already converted to equity (synonymous for “ownership”) in the home. So remember, if you buy a home for $500,000 and you seek to use the delayed purchase finance exception, you’re not getting a loan for $500K, but probably $400K or less (this would be equivalent to an 80% loan-to-value and 20% down payment, for example). This may seem obvious but it can get lost in the shuffle of conceptualizing the recoupment of funds. You’re recovering what you would have otherwise financed, not the full purchase price amount.
Let’s paint a common picture. Sometimes given the competitiveness of the market, a young couple seeking to buy a home might lose out on a number of bids. Maybe they even have 20 or 25% to put down, but still, time and again they are outbid. Finally, their generous parents swoop in and agree to help them buy the home all-cash so that they have an edge and, lo and behold, they win this bid. Next, our young couple goes to refinance the home with the delayed purchase finance exception and we ask from where the funds to purchase came. “Oh, that was a gift from our parents…” Well, now we have an issue because technically gifts have no expectation of repayment. So in structuring the acquisition, it’s important that our buyers understand the implications of source of funds, particularly when it comes to gifts, and how to otherwise structure their purchase so they can recoup via mortgage financing later. Get in touch if you have this scenario yourself.
Another potential asset hiccup occurs when delayed financing coincides with a jumbo loan amount. As we’ve discussed in prior blogs, jumbo loans require asset reserves. If a cash buyer delves too deep into his savings to buy a home with cash, he may come up short on the assets that were earmarked for meeting the reserve requirement. The funds are no longer liquid assets, but instead equity in real estate and cannot be considered as reserves. What’s happened here is that this buyer’s assets have been reclassified as equity.
Some scenarios and lenders will price out a delayed purchase differently than a traditional purchase. Usually where this happens, the rate on the delayed purchase would be higher. That’s because these lenders will view these transactions like a cash-out refinance instead of a “purchase money” loan. And in the realm of lending, a cash-out refinance is perceived as riskier and thus it comes with a higher rate.
It’s important to begin with the end in mind when contemplating delayed purchase financing. Yes, it’s a great way to get a jump on making a competitive offer on a home, but adding the mortgage later is not exactly the same as adding it at the time of purchase. Because of this, discussing with a mortgage professional how the end loan will look before making the leap into an all-cash purchase is the best strategy. The good news is that you can still pre-approve for the loan in advance of your purchase. If you feel that a cash offer is going to be what’s required to prevail in your market, getting a pre-approval for a delayed finance mortgage is exactly what you should do.
Vice President of Mortgage Lending
Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709
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