Is Delayed Financing Considered a Cash-Out Refinance?

Delayed financing allows a homebuyer who purchased a property with cash to subsequently obtain a mortgage. This financial tool is often used by buyers who want to make a competitive all-cash offer to a seller. According to guidelines from government-sponsored enterprises like Fannie Mae, this transaction is a specific provision within cash-out refinance rules. The primary benefit is that it allows the borrower to get a cash-out refinance without the typical six-month waiting period, enabling them to replenish the personal funds used for the initial purchase.

The Delayed Financing Exception

A cash-out refinance involves a homeowner borrowing against their accumulated home equity. This type of loan often comes with higher interest rates and more stringent lending requirements because it increases the lender’s risk.

The “delayed financing exception” alters this dynamic for recent cash buyers by waiving the standard waiting period. This provision, outlined in Fannie Mae’s selling guide, allows a new mortgage to be taken out shortly after a cash purchase. However, the loan is still qualified, underwritten, and priced as a cash-out refinance. The advantage is the ability to access financing immediately instead of waiting several months.

This exception acknowledges the unique circumstances of a cash buyer who intends to finance the property shortly after closing. The underlying principle is that the borrower is not leveraging the property to generate cash for other purposes but is simply converting their initial cash outlay into a standard mortgage. This treatment helps cash buyers maintain liquidity without being subject to the usual waiting period.

Eligibility Requirements for Delayed Financing

To qualify for the delayed financing exception, both the borrower and the original purchase transaction must meet several strict criteria. The original purchase must have been an “arm’s-length transaction,” meaning the buyer and seller are unrelated and acting in their own best interests.

A requirement is that the property must be free of any liens at the time of the new loan application. This means there can be no existing mortgages or other secured debts against the property. The financing must also occur within six months of the original cash purchase date. This window is measured from the date on the settlement statement of the cash purchase to the disbursement date of the new loan.

The original transaction must have been a true “cash purchase,” with no loan funds used to acquire the property. Lenders will require documentation to verify the source of the funds, which must come from the borrower’s own assets. The new loan amount cannot exceed the documented original purchase price, plus any financed closing costs, prepaid fees, and points.

Required Documentation for the Application

When applying for delayed financing, a specific set of documents is necessary to prove eligibility under the exception guidelines.

• The final Closing Disclosure or HUD-1 Settlement Statement from the original cash purchase. This document verifies the purchase price, the closing date, and confirms that no mortgage financing was used in the transaction.
• Clear proof of the source of funds used for the purchase. This is accomplished by submitting bank or investment account statements showing the funds leaving the account to pay for the property.
• A preliminary title report or title search is also required to confirm that there are no existing liens or mortgages on the property.
• A standard mortgage application package. This includes income verification documents like pay stubs and W-2s, recent asset statements for all accounts, and authorization for the lender to pull a credit report.

The Delayed Financing Application Process

The first step in the delayed financing process is to find a lender that offers this specific program, as not all banks or mortgage companies do. Once a suitable lender is found, the borrower submits the complete application package, which includes all the standard mortgage documents plus the specific paperwork verifying the cash purchase and source of funds.

After the application is submitted, the lender will order a property appraisal to determine its current market value. This value is used to calculate the loan-to-value (LTV) ratio. However, the maximum loan amount is capped at the original purchase price plus any financed closing costs, prepaids, and points. This structure prevents the borrower from cashing out on any market appreciation that may have occurred since the purchase.

The application then moves to the underwriting stage, where the lender’s underwriters review all documentation to ensure it meets the guidelines for the delayed financing exception. They will verify the arm’s-length nature of the original transaction, the source of funds, and the absence of liens. Upon approval, the loan proceeds to closing, and the funds are disbursed, effectively replenishing the cash the borrower used for the initial purchase.