Delayed Financing - Winning in a Competitive Market
What is delayed financing? That's another topic for another blog, but the good news is that it's already written and you can find it by clicking here
If you're already familiar with the topic and the concept, you've maybe gotten some basic information but delayed financing could still be a mystery to you. What are rates like? How do I get the cash (and does it matter how?)? Why does the program exist?
In today's market, we're seeing a strong demand for delayed financing, and that's usually the case in markets with low inventory, regular bidding wars, and cash buyers competing with first time buyers, move up buyers, and everyone in between. In addition, with rates near historic lows, delayed financing makes more sense than ever!
How can Delayed Financing help you get a house in a Competitive Market?
Delayed Financing allows you the best of both worlds - a cash offer and financing to replenish funds. This means you can compete with cash buyers/investors while only temporarily being out of cash. You can purchase cash, close quickly, get a home in need of repairs up to par for an appraisal, then immediately get your cash back. It's a win-win-win for all involved.
What are rates like?
Rates are higher than for a purchase-money mortgage, BUT, today's cash out refinance (delayed financing included) rates are typically only slightly higher than purchase rates, AND tend to be lower than the average return in the S&P 500. What this means is that from a financial growth perspective, you'd earn more putting your cash into the markets with a good advisor than putting it toward a low-rate mortgage on an appreciating asset (a house). The slight difference in rate is offset completely be a host of other advantages.
How long does the process take?
Delayed financing is just a type of cash out refinance, so the process from application through funding (when you get sent your money) is the same as any other refinance transaction. A couple things to note, though, that must be accounted for: the property must be owned for an appraisal/title to be completed, so even though you KNOW you'll be using delayed financing, you can't get too far into the process prior to making settlement and taking ownership of a house.
What are the benefits?
There are numerous benefits to delayed financing. For one, offering cash for the purchase part of your transaction can help you better compete with cash buyers and offer sellers faster closings with less changes for your contract to fall through (did you know THIRTY+ PERCENT of sales contracts fall apart due to financing nationwide!?!?). Of course, sometimes a cash offer will get a house for a lower price than one with a financing contingency as well in some markets.
On the other, less thought about hand, is that with mortgage rates near their historic lows, where is money best placed month to month? In paying down an ever-appreciating asset strapped with extremely low rate debt with a long period of amortization? Or toward equities that regularly see growth rates exceed the rate of debt attached to a mortgage? Or, easier to understand, is your money best served in avoiding debt with a 2-4% interest rate attached to it, or by putting funds instead toward assets that will have a long term growth rate of 6-10%? For me, I'd rather enjoy the 6-10% returns and the compounded interest that results from it, and continue making mortgage payments. Delayed financing allows investors that option. Cash is better served going somewhere else other than toward paying off a house, in almost every case (except for those few fortunate people where money/disposable income is no concern).
Where does the money come from?
One of the 'small print' aspects of delayed financing, is any money drawn from the process MUST go toward replenishing the funds that were used to make a cash purchase.
Use a HELOC to draw money to buy a place? Then the delayed financing funds must pay that HELOC back down. Borrower money from family? You MUST have the loan documented, along with payment expectations and if necessary, installment payment information. Gift funds? That's a no-no. Since gifts have no expectation of repayment, delayed financing cannot be used to compensate someone on 'gift funds' (because if you're paying it back, it wasn't a gift!).
But this aspect of delayed financing reminds people that you CAN borrow money from someone to buy a house cash, then use delayed financing to pay them back, in full or in part. So for those of us not wealthy enough to write a check to buy a house, family and other debt instruments are options to acquire a house cash.
Whether it's to better position yourself financially, to win in a competitive market, or to accommodate the need for an extremely fast closing, delayed financing is a way for borrowers to leverage both a cash purchase AND mortgage financing without the standard 6 month wait required for most cash out transactions.
For questions on delayed financing or anything else mortgage related, please don't hesitate to reach out at 484.680.4852 or ask an expert here. This product can help Realtors sell more homes with less offers, avoid the heartbreak of a buyer missing out on their dream home, or create a simple way for investors to buy multiple properties in a short period of time without diminishing their capital.
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