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How a Delayed Mortgage Works
A delayed mortgage enables you to immediately do a cash-out refinance on a property you purchased for cash. Borrowers are usually required to wait twelve months from the date a property purchase closes before they are permitted to do a standard cash-out refinance. Additionally, if you perform significant renovations on the property such as a "fix & flip", lender guidelines usually require you to wait one year before the post-renovation value of the property can be used for the purpose of refinancing, which allows you to qualify for a larger loan amount. A delayed mortgage enables you to access the equity in your home sooner and potentially take more money out than a standard cash-out refinance program
Now that you understand why people buy properties for cash, the question becomes why apply a delayed mortgage instead of waiting twelve months to do standard cash-out refinance? There are also many reasons to choose a delayed mortgage, including:
- you do not want to wait twelve months or potentially longer to access the equity in your property
- you think mortgage rates are going to increase and you do not want to wait twelve months to refinance
- your credit or financial profile changed and you are now able to qualify for a mortgage
- you have new bills or debt that you want to pay down or pay off
- want to use the equity in an investment property to buy other properties
- potential tax benefits from mortgage
Delayed mortgages are offered by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions. Mortgage banks and mortgage brokers are more likely to offer the program than big banks or credit unions. Because of its limited availability there is more variation in mortgage rates and closing costs across lenders, which makes shopping for your mortgage even more important. We recommend that you contact multiple lenders in the table below to understand if they offer delayed mortgages and to request loan terms. Like with all programs, you should compare proposals from at least five lenders to find the delayed mortgage with the lowest rate and fees.
A delayed mortgage enables you to purchase a property with cash and then access the equity in the property soon after you bought it so the initial question is why buy a home for cash? People buy homes for cash for many reasons, including:
- removes financing contingency when buying a home which can be a competitive advantage in a hot real estate market
- accelerates the home buying process
- may be preferred by the property seller
- no closing costs or fees associated with mortgage
- you may not be able to qualify for a mortgage at the time you buy the home but you should be able to qualify in the future
- may not be able to arrange financing if the property is in poor condition such as a fixer upper
- fix & flip investor
- may be easier to purchase real estate owned (REO) properties through a foreclosure or a short sale by paying cash
The credit score, debt-to-income ratio and other borrower qualification guidelines for a delayed mortgage are similar to the guidelines for a standard cash-out refinance but the delayed mortgage program imposes an additional set of requirements, most of which are related to the initial property purchase.
The borrower is required to provide the closing documentation, including the settlement statement and grant deed, from the property purchase to confirm that the property was bought for cash and not financed with any loans against the property. The title report requested by the lender when you apply for a delayed mortgage must also show no debts or liens against the property.
The borrower is also required to provide documents such as bank or brokerage account statements, pay stubs, tax returns and gift letters that verify of the source of funds used to buy the property for cash. If you used a personal loan or home equity loan or home equity line of credit (HELOC) on a another property to purchase the home then you are also required to provide documents for those loans.
The property purchase is required to be an arms-length transaction which means the sale was negotiated in good faith between two unrelated parties. For example, if you purchased the property from a relative, friend or professional colleague then you may not be eligible for a delayed mortgage.
For a single unit primary residence, you are usually allowed to take-out up to 80% of your property’s value, for a maximum loan-to-value (LTV) ratio of 80%. For a single unit second home or investment property the maximum LTV ratio for a delayed mortgage is typically 75%.
The table below outlines the maximum LTV ratio for a delayed mortgage based on the number of units in the property and the occupancy of the property. Please note that the LTV ratio for a delayed mortgage is calculated based on the current appraised property value so if you have made improvements you benefit from the higher, after renovation property value.
In addition to the LTV ratio guidelines outlined above, the mortgage amount plus closing costs and applicable fees cannot exceed the price you paid for the property. For example, if you purchased a property for $150,000, your delayed mortgage loan amount plus closing costs and fees cannot exceed $150,000, subject to the maximum LTV ratio limit. This guideline is important for fix & flip investors or if you put a substantial amount of money into the property after you renovated it, which significantly increased the property value. Additionally, if you used a gift to pay for all or part of the property, the amount of the gift is subtracted from the maximum loan amount you are eligible for.
Our free personalized mortgage quote form enables you to review loan quotes from leading lenders. Our quote feature is easy-to-use, requires minimal personal information and does not impact your credit. Comparing multiple proposals is the best way to save money on your mortgage.
If you used a personal loan or home equity loan or HELOC on another property to purchase the home then the proceeds from the delayed mortgage must be used to pay off or pay down those loans. Additionally, the proceeds from a delayed mortgage cannot be used to repay a gift that was used to purchase the property for cash. These are the only two restrictions on how you use the proceeds from a delayed mortgage.
The delayed mortgage program is subject to conforming loan limits, which vary by county and the number of units in a property. The conforming loan limit in the contiguous United States for a single unit property ranges from $726,200 to $1,089,300 in higher cost counties. In Alaska and Hawaii the loan limit is $1,089,300 for a single unit property.
One-to-four unit owner-occupied properties, second homes and investment properties are eligible for a delayed mortgage.
Conventional loans are eligible for a delayed mortgage while the FHA, VA and USDA mortgage programs are not.
Use the FREEandCLEAR Lender Directory to search for twenty-five mortgage programs offered by top-rated lenders.
A delayed mortgage imposes additional qualification requirements on borrowers including documentation requirements that are not associated with a standard cash-out refinance. Additionally, the program typically charges a higher mortgage rate and fees than a standard cash-out refinance. This is because of the specialized nature of the program and because fewer lenders offer delayed mortgages. Fewer lenders offering the program means less competition which means higher interest rates and fees for borrowers. Borrowers should weigh the benefits of doing a delayed financing to access the equity in their home sooner against the cost savings they could realize by waiting longer and doing a standard cash-out refinance.
Sources
"B2-1.3-03, Delayed Financing Exception." Selling Guide: Fannie Mae Single Family. Fannie Mae, July 3 2019. Web.
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