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Delayed financing is a financial technique where an individual initially purchases a property with cash and then shortly afterwards, secures a mortgage loan on that property. It’s reversing the usual order – instead of getting a loan to buy a house, you buy it first and then get the loan.
This can be handy if you need to move quickly to buy a property or if you want to free up your cash for other things after buying a house. It can also be beneficial if the property you want to purchase needs some repairs to qualify for mortgage financing.
Let’s explore how delayed financing works and if it’s the right choice for you.
Key Features of Delayed Financing
- Immediate Cash Reimbursement: Allows you to recover their cash soon after a cash purchase.
- Avoids Traditional Mortgage Delays: Bypasses the usual waiting period associated with traditional mortgage approvals.
- Loan-to-Value Ratio: Based on the property’s appraised value, not just the purchase price (typically lenders will only finance up to 75% of the appraised value).
- Interest Rates and Terms: Can offer competitive interest rates and terms similar to traditional mortgages.
- Flexibility in Property Use: Useful for various property types, including investment properties and primary residences.
History of Delayed Financing
Delayed financing emerged as a notable concept following the 2008 financial crisis. During this period, cash purchases in the real estate market increased significantly due to stringent lending standards and a surplus of distressed properties. To accommodate this shift, lenders devised the delayed financing exception, allowing investors and homeowners to quickly recoup their cash while still benefiting from mortgage finance rates.
» MORE: See today’s refinance rates
How Delayed Financing for a Mortgage Works
Initially, an investor or homebuyer purchases a property outright using cash, without any loan assistance. This cash purchase can be advantageous, especially in competitive real estate markets where sellers often prefer quick, cash transactions.
After the property is acquired, the buyer then applies for a mortgage on this property, a process that typically happens immediately following the purchase. The lender evaluates the property, often considering its appraised value rather than just the purchase price.
If approved, the buyer receives a mortgage loan that reimburses them for a significant portion of the cash they initially used. This loan amount is usually determined based on a percentage of the property’s value, known as the loan-to-value ratio. By doing this, the buyer replaces their cash expense with a mortgage, thereby freeing up their cash for other uses.
Let’s consider an example of delayed financing with a homebuyer named Alex. Alex found a desirable property listed for $300,000 in a competitive market. To secure the property quickly and make a compelling offer, Alex decided to purchase the property outright with $300,000 in cash. This cash purchase was strategic, allowing Alex to outbid other potential buyers who might have needed time for mortgage approvals.
After owning the property for a short period, Alex opted for delayed financing to recover some of the cash spent. The property was appraised at $320,000, which is higher than the purchase price. Based on the loan-to-value ratio, the lender agreed to provide a mortgage of $240,000 (75% of the appraised value).
With this mortgage, Alex was able to get back a substantial part of the initial cash outlay, leaving him with more liquidity for other investments or expenses, while also enjoying the benefits of a traditional mortgage.
Impact of Delayed Financing
The impact of delayed financing on the real estate market has been significant, particularly in providing increased investment opportunities. It offers flexibility for investors to move quickly on property deals, a critical advantage in fast-paced real estate environments. Additionally, it enhances market liquidity by allowing cash to be recycled more efficiently, enabling investors to redeploy funds into new investments or other financial needs swiftly.
Is Delayed Financing Right for You?
Determining if delayed financing is for you depends on several factors, including your financial situation, investment strategy, and risk tolerance. It is ideal for those with significant cash reserves who seek to leverage their purchasing power in the real estate market. For investors, delayed financing is particularly attractive as it enables them to quickly reinvest or diversify their portfolio, keeping their capital fluid and responsive to new opportunities.
However, it requires a deep understanding of market trends and a willingness to navigate the complexities of mortgage financing. Each individual’s financial goals and circumstances will dictate whether delayed financing is a prudent approach. As with any financial decision, it is recommended to consult with financial advisors to understand the implications fully and to tailor the strategy to one’s specific needs and goals.