Buying a Home All Cash, Then Getting a Mortgage

By
Mortgage and Lending with Guaranteed Rate, Marin County, CA NMLS: 22343

Buying a Home All Cash, Then Getting a Mortgage

  

Back in a real estate market a long time ago and in a mortgage galaxy far, far away --- otherwise known as 2009/2010 --- some buyers needed to purchase a home with cash, then hope to refinance after they had the keys in hand.  The reason for this?  Bad credit?  Nope.  Extinction of stated income loans?  Sorry, try again.  The reason was often that the homes were not eligible for financing --- many had been ravaged by the neglect of economic downturn.  Plumbing was torn out, there were holes in the walls and a good number of the properties that came on the market through short sales, foreclosures and otherwise were just in various problematic states of disrepair.  They could not pass the appraisal test for "as is" condition, and so buyers needed either a private money ("fix and flip") loan or cold hard cash in order to make the purchase.

 

In response to market conditions, a guideline provision known as "delayed purchase financing," or "delayed purchase" or "recoup of funds" was implemented.  This allowed a homebuyer to get what was essentially a cash-out refinance shortly after buying a home with cash.  Heretofore, it had not been possible to get a cash-out loan within the first six months of ownership --- sort of an industry standard also aimed at preventing fraud.  But with the volume of homes purchased "free and clear" out of necessity, the lending guidebook needed to adjust its sails to reality and create a finance option for buyers who ultimately desired to have a mortgage.  The delayed purchase finance exception became reality.

 

Flash forward to 2021, and many of California housing markets are demanding the benefits of delayed purchase financing for an entirely different reason --- fierce competition.  Buyers today feel they are being forced to make cash offers to appear most attractive to sellers who have lots of choices.  And in a world where certainty and speed are highly desirable, cash is king.  I'm not kidding you when I say that houses worth $3MM or more routinely sell all-cash in our area.  But at the end of that luxurious day, some of those buyers still hope to put a mortgage, at today's low rates, on the property and recoup some of their cash investment.  So how do they do it?

 

How Does Delayed Purchase Financing Work?

 

The question above can best be answered by saying that if you think of this transaction JUST LIKE a purchase money loan, you will be very near to the truth.  That is, the income, assets and credit you'd need to qualify if you were buying and financing the home traditionally still all apply if you are doing delayed financing.  But like with all things mortgage, there are  a few exceptions, potential snags and special considerations...

 

Down Payment

When you buy traditionally, you have a down payment and a mortgage and the two amounts added together total your purchase price.  But when you finance after purchase you're just obtaining a mortgage and the "down payment" is already converted to equity (synonymous for "ownership") in the home.  So remember, if you buy a home for $500,000 and you seek to use the delayed purchase finance exception, you're not getting a loan for $500K, but probably $400K or less (this would be equivalent to an 80% loan-to-value and 20% down payment, for example).  This may seem obvious but it can get lost in the shuffle of conceptualizing the recoupment of funds.  You're recovering what you would have otherwise financed, not the full purchase price amount.

 

 

Gift Funds

Let's paint a common picture.  Sometimes given the competitiveness of the market, a young couple seeking to buy a home might lose out on a number of bids.  Maybe they even have 20 or 25% to put down, but still, time and again they are outbid.  Finally, their generous parents swoop in and agree to help them buy the home all-cash so that they have an edge and, lo and behold, they win this bid.  Next, our young couple goes to refinance the home with the delayed purchase finance exception and we ask from where the funds to purchase came.  "Oh, that was a gift from our parents..."  Well, now we have an issue because technically gifts have no expectation of repayment.  So in structuring the acquisition, it's important that our buyers understand the implications of source of funds, particularly when it comes to gifts, and how to otherwise structure their purchase so they can recoup via mortgage financing later.  Get in touch if you have this scenario yourself.

 

 

Reserves

Another potential asset hiccup occurs when delayed financing coincides with a jumbo loan amount.  As we've discussed in prior blogs, jumbo loans require asset reserves.  If a cash buyer delves too deep into his savings to buy a home with cash, he may come up short on the assets that were earmarked for meeting the reserve requirement.  The funds are no longer liquid assets, but instead equity in real estate and cannot be considered as reserves.  What's happened here is that this buyer's assets have been reclassified as equity.

 

Rate Differences?

Some scenarios and lenders will price out a delayed purchase differently than a traditional purchase.  Usually where this happens, the rate on the delayed purchase would be higher.  That's because these lenders will view these transactions like a cash-out refinance instead of a "purchase money" loan.  And in the realm of lending, a cash-out refinance is perceived as riskier and thus it comes with a higher rate.

 

 

It's important to begin with the end in mind when contemplating delayed purchase financing.  Yes, it's a great way to get a jump on making a competitive offer on a home, but adding the mortgage later is not exactly the same as adding it at the time of purchase.  Because of this, discussing with a mortgage professional how the end loan will look before making the leap into an all-cash purchase is the best strategy.  The good news is that you can still pre-approve for the loan in advance of your purchase.  If you feel that a cash offer is going to be what's required to prevail in your market, getting a pre-approval for a delayed finance mortgage is exactly what you should do. 

 

Don't delay,

 

Rob Spinosa
Vice President of Mortgage Lending

Guaranteed Rate
NMLS: 22343 
Cell/Text: 415-367-5959 
rob.spinosa@rate.com

 

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960

Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709
 

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate's Human Resources Department.

 

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 - (866) 934-7283

Comments (25)

Tom Bailey
Margaret Rudd & Associates Inc. - Oak Island, NC

Great article, thanks for posting. In the case of parents gift, would it be better for the parents to buy the house and sell it to the kids

Apr 16, 2021 12:40 PM
Rob Spinosa

Tom, they could do this but it's complicated too, because then you have another transfer that could look unusual, you have a "non arm's length" transaction and the buyer still needs to solve for down payment, etc.  So the answer is "yes," they could do it this way, but if the funds aren't all qualifiable as for a purchase, it will only add to the difficulty of achieving the end goal

Apr 16, 2021 01:45 PM
Jim Paulson

I just had this discussion with a client two days ago and warned of the potential added scrutiny due to not being an arms length transaction to the kids.

Apr 23, 2021 08:59 AM
Ed Silva
Mapleridge Realty, CT 203-206-0754 - Waterbury, CT
Central CT Real Estate Broker Serving all equally

Great information here.  I don't know if that;s available back here in CT or if it would be a possibility for a buyer that has their current home under contract to be able to use this delayed financing loan as a bridge?

Apr 16, 2021 01:34 PM
Georgie Hunter R(S) 58089
Hawai'i Life Real Estate Brokers - Haiku, HI
Maui Real Estate sales and lifestyle info

Thanks for sharing this good information with us, and with potential buyers.

Apr 16, 2021 04:56 PM
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

That's the ultimate dream to have enough cash to just buy something outright, right? I can dig it

Apr 16, 2021 10:27 PM
Grant Schneider
Performance Development Strategies - Armonk, NY
Your Coach Helping You Create Successful Outcomes

Good morning Ron - I certainly learned a little more about buying for cash and financing later.

Apr 17, 2021 03:39 AM
Nina Hollander, Broker
Coldwell Banker Realty - Charlotte, NC
Your Greater Charlotte Realtor

What a great post, Rob. I've had a number of clients in the past who did this (including myself and my husband). These days it's even more important to have that option for buyers to compete.

Apr 17, 2021 05:12 AM
Kat Palmiotti
406-270-3667, kat@thehousekat.com, Broker, eXp Realty - Kalispell, MT
Helping your Montana dreams take root

This is an excellent overview of the possibilities and challenges associated with buying with cash, then getting a loan. I think the most important thing anyone should do is to contact their mortgage professional before doing anything!

Apr 17, 2021 05:28 AM
Andrew Mooers | 207.532.6573
MOOERS REALTY - Houlton, ME
Northern Maine Real Estate-Aroostook County Broker

Cash happens more often too in low priced rural areas of the country. Not because of the house looks like Stephen King made a movie there and can't pass the turn your head and cough of mortgage underwriting. But just good bones and loaded with a job jar of catch up repairs and renovations that make it "dirty but nice", priced low to the ground. Great post Rob!

Apr 17, 2021 05:33 AM
Dorie Dillard Austin TX
Coldwell Banker Realty ~ 512.750.6899 - Austin, TX
NW Austin ~ Canyon Creek and Spicewood/Balcones

Good morning Rob,

Excellent post as we are seeing many companies now offering to help a buyer by paying cash for the home (winning the bid) and then entering into a delayed financing with the buyer. I've seen Homeword and Homelight as 2 companies doing this and just closed with both companies (I'm representing the seller) and the process was went surprisingly smooth.

Apr 17, 2021 06:32 AM
Sham Reddy CRS
H E R Realty, Dayton, OH - Dayton, OH
CRS

Thanks for sharing Rob!!!

Buyers today feel they are being forced to make cash offers to appear most attractive to sellers who have lots of choices.  And in a world where certainty and speed are highly desirable, cash is king

Apr 17, 2021 11:13 AM
Jane Peters
Home Jane Realty - Los Angeles, CA
Los Angeles real estate concierge services

This is a great explanation of the mechanics of buying for cash and then financing the property. It isn't easy, but with someone as knowledgeable as you guiding yor clients through this is a great option in todays crazy market.

Apr 17, 2021 01:17 PM
Jeff Dowler, CRS
eXp Realty of California, Inc. - Carlsbad, CA
The Southern California Relocation Dude

Great education, Rob. This was not something I was aware of. Sounds like a good option for some in this cray market!

 

Jeff

 

Apr 17, 2021 08:41 PM
Sam Shueh
(408) 425-1601 - San Jose, CA
mba, cdpe, reopro, pe

My brother in law's parents fled from the Communists and bought their first home in Hong Kong paying in gold bars.  After signing the contract the sellers gave them the keys.  It was later they were told the seller was the property manager and had disappeared. I was told recently it happens still especially in leasing business. The entire industry is not well regulated.  Keller Williams tried to get into franchise business in Korea. They found out all realtors are mom and pop operations using no MLS. Sellers can sign as many contracts with diffrerent brokerages. 

 

Apr 18, 2021 07:47 AM
Dave Barnes
Denver, CO

How do you buy a house with cash?

I was told buy the title company that they would not accept cash.

Apr 19, 2021 03:31 PM
Dora Griffin
D A Griffin Financial.LLC - Fort Thomas, KY
NMLS 6380

Nice post.  I didn't believe it a year ago when agents were saying they had cash buyers. Our market is the same in that cash buyers are taking the bids, well, if they also bid over asking.  It is very frustrating for the buyers wanting to get their first home.

Apr 20, 2021 07:35 AM
Dorte Engel
RE/MAX Leading Edge - Bowie, MD
ABC - Annapolis, Bowie, Crofton & rest of Maryland

Dear Rob,

Wonderful for those who have the cash to do this. I have had cash buyers only a few times in my career. Unicorns they are to me.

Apr 20, 2021 08:49 PM
Erik Hiss
Keller Williams Capital Partners Realty - Worthington, OH
You can trust me for all your real estate needs!

Cash offers are MUCH more prevalent in today's market but few have the resources or the wherewithall to make that happen. At the same time financed offers with appraisal coverage are about the same thing just take longer. Timing is a huge factor with cash offers. If timing isn't an issue sellers are more favorable to the higher price of a guaranteed financed offer. 

Apr 21, 2021 07:14 AM
Paula McDonald, Ph.D.
Beam & Branch Realty - Granbury, TX
Granbury, TX 936-203-0279

A great blog topic Rob and thank you for sharing this. I have a few folks who might benefit from this tactic.

Apr 22, 2021 12:10 PM
Wayne Martin
Wayne M Martin - Chicago, IL
Real Estate Broker - Retired

Good morning Rob. Must say, I was not aware this type of financing was an option for those well heeled buyers looking to free up cash after the transaciton is closed. Thanks. Enjoy your day!

Apr 24, 2021 05:13 AM
Debe Maxwell, CRS
www.iCharlotteHomes.com | The Maxwell House Group | RE/MAX Executive | (704) 491-3310 - Charlotte, NC
The right Charlotte REALTOR!

This year has definitely been the year for this maneuver, Rob. It's the one way our buyers can win in a bidding war. 

 

Great post and wonderful advice. Thank you!

Apr 25, 2021 09:23 AM

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