It’s a rather odd term and something that’s somewhat counter-intuitive at first glance. The term “delayed financing” might indicate nothing more than putting off a home purchase or waiting to qualify for a mortgage. But it is a new term and something that Fannie Mae came up with in 2011. The loan program is currently little used but is certainly a viable option in specific circumstances. In fact, not every lender offers the program much less promotes it. After all, how can a lender make any money by delaying the financing of a home?
Delayed Financing Defined
“Delayed” simply means a property owner can finance a property even after the property has been purchased. The transaction involves an owner paying cash for the real estate then immediately financing the purchase with a new loan, replacing most of the original cash used for the transaction. But the program had to address the “seasoning” issue. And this program does by eliminating a seasoning requirement altogether.
A “seasoned” purchase is one that has been in place for a minimum amount of time. This has been put in place to more accurately determine the current market value of a property. Before seasoning requirements, a buyer and a seller could collude and sell the property below market then immediately pull cash out of the home with an inflated value. The borrowers would pocket the money and if a foreclosure ever took place, the lender found that the home was worth much less than what is owed.
Fannie’s seasoning requirement was six months but is now effectively eliminated. You can pay cash for a home today and apply for a cash out refinance the very next day. No seasoning needed. Why the change?
Fannie Mae Delayed Financing Rule meant to Move Housing Inventory
The program was first introduced three years ago to help distressed properties get back into shape and ready for the market. There are few options for permanent financing that allow a buyer to obtain financing to acquire and rehabilitate a property with one loan program, such as FHA’s 203(k) program. But unless the lender has direct 203(k) experience, this program can be confusing as well as time-consuming.
When any conventional mortgage is placed on a home, both the borrower as well as the asset being acquired must pass certain qualification tests. Besides helping determine market value, the lender must make certain the property is habitable. If the home is in such poor shape that no one can reasonably live there, the home must be repaired or rehabilitated prior to any loan approval.
Prior to the introduction of the delayed financing program, borrowers had to wait six months before tapping into the equity of the home with a cash out refinance. With this program, the requirement is waived.
That means borrowers can buy properties that need some repairs with cash, make the necessary changes to the property then reimburse themselves by pulling cash out of the property and replenishing their cash reserves.
Delayed Financing Utilized after Foreclosure Auctions
The delayed financing rule is especially advantageous to buyers who attend foreclosure auctions and successfully bid on a home. While there are general guidelines buyers must follow when buying foreclosed homes there can be somewhat different rules from state to state, county to county. For example, in some places the successful bidder at a foreclosure auction is required to put down a cash deposit and has 24 hours to come up with the remainder. Some states allow for slightly longer periods, perhaps up to seven days.
With the delayed financing arrangement, the buyer provides the cash, closes on the property then pulls out most of the cash with a delayed financing mortgage. The program follows standard “cash out” financing rules and is limited to 70% of the value of the property along with a slightly higher interest rate when compared to a refinance with no cash out.
There really isn’t much in order of qualifying compared to any other conventional mortgage as long as the cash-out rules are followed. But there are some things the potential borrower must do in order to obtain the new loan. The borrower must document the sale which can be done with a signed and notarized copy of the settlement statement, the funds used to pay for the property must be verified as the borrower’s own funds and the new loan can’t be greater than the original purchase price and limited to 70% of the newly appraised value.
The program isn’t property-specific and can be applied to a primary residence, a second home or vacation home and even a rental property up to four units.
There hasn’t been nor will there likely be a mad dash to a conventional lender for this program as it addresses a very narrow slice of the existing home inventory. But for borrowers who want to have near-immediate access to the equity in their property, the delayed financing program is the perfect solution.