A cash-out refinance is a common strategy used by homeowners to leverage their home equity for financial gain.
However, traditional cash-out refinances often require borrowers to wait a certain period of time before they can access their equity. This waiting period can be a barrier for those looking to quickly take advantage of their home equity.
Enter the “delayed financing” cash-out refinance, a relatively new financing option.
A delayed financing exception allows you to tap into your home equity immediately after purchasing a property with cash instead of waiting the 6-month seasoning period most lenders usually require.
Fannie Mae’s 2011 Delayed Financing Rule
In 2011, Fannie Mae’s delayed financing rule gave guidelines that allowed borrowers to get a cash-out refinance loan on a property they had purchased recently with cash.
Previously, borrowers were required to wait six months before taking cash out by refinancing, even if it was a cash purchase. Under the 2011 exception, borrowers could immediately get a cash-out refinance up to the purchase price of the property, as long as they met certain requirements, which we will discuss later.
Why Was the Rule Introduced and Who Benefitted?
The real estate market in 2011 was still recovering from the 2008-2009 housing crisis, presenting both challenges and opportunities for investors and homebuyers.
Lending standards had become much stricter, making it difficult for some borrowers to obtain financing for home purchases. There was also a high rate of foreclosures, leading to an influx of distressed properties on the market and creating opportunities for investors to purchase properties at discounted prices.
However, many investors who purchased properties with cash were facing the challenge of waiting six months before they could cash-out equity.
The delayed financing rule addressed this problem by allowing these borrowers to do a cash-out refinance after a cash purchase. Sometimes, the cash-out could be as much as the purchase price of the property.
By providing this financing option, the delayed financing rule allowed investors and homebuyers to quickly access their equity and reinvest it into other properties or businesses.
This helped to stimulate the housing market and promote economic growth by increasing investment activity.
Delayed Financing Exception Requirements
To be eligible for a delayed financing exception with a cash-out refinance loan, there are certain criteria lenders look for:
- You purchased the property in full, with cash, within the past six months.
- The source of the funds to purchase the property is documented.
- You have title to the property at the time of the cash-out refinance.
- There are no outstanding liens or judgements on the property.
- The purchase was an arms-length transaction, meaning you had no previous connection with the seller.
- The new loan amount cannot exceed the purchase price or the appraised value at the time of the cash-out refinance.
Each lender will also have its own standard eligibility and underwriting requirements for delayed financing cash-out mortgage.
Pros and Cons
Delayed financing in cash-out refinancing can be a useful financing option if you have recently purchased a property with cash and want to quickly access the equity. However, as with any financing option, there are pros and cons.
- Buyer advantage. You can be competitive in a seller’s market where cash is king. You can make an all-cash offer knowing you access the funds immediately after the transaction with delayed financing.
- Quick access to funds: You can quickly access equity by obtaining a cash-out refinance immediately after purchasing a property with cash, without the standard six-month waiting period.
- Flexibility: You can use the cash-out for making repairs or renovations, investing in other properties, or paying off high-interest debt.
- Potential loss of equity. If the real estate market declines, there is a chance the property’s appraisal will come in lower than what you paid, meaning you won’t be able to cash out the entire amount you invested.
- Cash reserves. You will temporarily have a large amount of cash tied up in the transaction, There is no guarantee that the lender will approve you for the delayed financing, and so there is some risk.
- Leaving some equity in home. The maximum loan amount might be the purchase price, but you will probably need to leave some equity in the home to avoid Private Mortgage Insurance (PMI) and to account for a potential decrease in value.
Overall, delayed financing cash-out refinancing can be a useful tool for borrowers who need quick access to funds after a cash purchase, but it is important to weigh the pros and cons before deciding.
In a traditional cash-out refinance, you are replacing a current mortgage with a new, larger mortgage to account for the amount you cash-out.
With a delayed financing exception you are reimbursing yourself with the cash you just invested in the home.
For the refinance, there are minimum and maximum loan amounts and also loan to value ratios depending on the loan type.
Minimum and Maximum Loan Amounts
The minimum and maximum loan amounts for delayed financing will depend on the lender.
Usually, lenders limit the maximum loan amount to the price you paid for the property, or what it appraised for at the time of the cash-out refinance, whichever is less. So, if you purchase a property in cash for $200,000, but when you apply for delayed financing in two month’s time the appraised value is $175,000, that would likely be the maximum loan amount.
The minimum loan amount varies, but is usually around $50,000.
Maximum Loan-to-Value Ratio
Besides meeting the lender’s credit and income requirements, most lenders have a maximum Loan-to-Value (LTV) ratio they follow with delayed financing based on the type and use of the property and the loan program used.
The LTV requirements also vary based on whether the delayed financing is fixed or adjustable rate.
Below is an example of the maximum LTV for fixed rate cash-out refinance loans.
|Maximum Loan-to-Value (LTV)
|Primary residence – single-unit
|Primary residence – 2-4 units
|Second home – single-unit
|Investment property – single-unit
|Investment property – 2-4 units
Overall, delayed financing for a cash-out refinance loan can be useful if you need quick access to the funds used to buy the property. You can use the funds for a variety of things like remodeling the property, investing in more real estate, or paying off debt.
It isn’t without its downfalls though, and you have to account for things like declining appraisal values and meeting the lender’s qualifications.