How a Delayed Mortgage Works
- Take cash out of a property you bough for cash immediately instead of waiting six to twelve months
- Access the equity in a property sooner than you can with a standard cash-out refinance
- Program applies to both primary residences and investment properties
- Beneficial to buyers in competitive real estate markets as well as fix & flip property investors
- Tougher qualification requirements including significant documentation from borrowers
- Higher mortgage rate and fees than a standard cash-out refinance
- Lower loan-to-value (LTV) ratio limit as compared to a standard cash-out refinance means you can access less equity in the property
- Some restrictions on use of proceeds including no repayment of gifts used to buy the property
- Fewer lenders offer program
- Loan limits
- What is a delayed mortgage?
- What are the benefits of buying a home for cash?
- 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
- What are the reasons to get a delayed mortgage?
- you do not want to wait six 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 six 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
- What are the requirements for a delayed mortgage?
- How much money can you take out of your home with a delayed mortgage?
- Are there restrictions on how you use the proceeds from a delayed mortgage?
- Are there limits to the size of loan you can obtain with a delayed mortgage?
- What types of properties are eligible for a delayed mortgage?
- What type of loan programs are eligible for a delayed mortgage?
- What are the negatives to a delayed mortgage?
- What lenders offer delayed mortgages?
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 six 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 than a standard cash-out refinance program.
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:
Now that you understand why people buy properties for cash, the question becomes why do a delayed mortgage instead of waiting six months to do standard cash-out refinance? There are also many reasons to choose a delayed mortgage, including:
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 qualification 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 are ineligible for a delayed mortgage.
For a primary residence, you are usually allowed to take-out up to 70% of your property’s value for a maximum loan-to-value (LTV) ratio of 70% as compared to a maximum LTV ratio of 80% for a standard cash-out refinance. This means that borrowers are able to take less cash out of their homes with a delayed mortgage as compared to a standard cash-out refinance. For a second home or investment property the maximum LTV ratio for a delayed mortgage is typically 60%.
Additionally, 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 a maximum LTV ratio of 70% for a primary residence.
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 $453,100 to $679,650 in higher cost counties. In Hawaii and Alaska the conforming loan limit ranges from $679,650 to $1,019,475 for a single unit property.
One-to-four unit owner-occupied properties, second homes and investment properties are eligible for a delayed mortgage.
A delayed mortgage imposes additional qualification requirements on borrowers including documentation requirements that are not associated with a standard cash-out refinance. Additionally, the delayed mortgage 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.
Delayed mortgages are offered by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions although not all lenders offer delayed mortgages and they are relatively uncommon. Mortgage banks and mortgage brokers are more likely to offer delayed mortgages than big banks or credit unions. Because fewer lenders offer delayed mortgages there is more variation in mortgage rates and closing costs across lenders. Like with all mortgage programs, borrowers should compare proposals from at least four lenders to find the delayed mortgage with the best terms.