Guide
How Does Delayed Financing Work After a Cash Purchase?
Delayed financing lets you refinance and take cash out of a home you bought with cash, within six months of the purchase, instead of waiting the usual six months to a year. Under Fannie Mae’s rule, the new loan can repay your documented purchase cost plus closing costs, subject to cash-out limits on loan-to-value.
Cash wins many foreclosure deals, but it ties up money that buyers often want back. Normally, a cash-out refinance requires that you have owned the home for at least six months. Fannie Mae’s delayed financing exception removes that wait when the purchase was truly paid with cash. For REO buyers, this means you can win a bid with cash, close fast and then replace most of that cash with a mortgage. It also works well with the buy, rehab, rent and refinance plan. Other REO financing guides are on the page about financing a bank-owned home.
On this page (7)
What Are Fannie Mae’s Delayed Financing Rules?
Fannie Mae’s delayed financing rules require an arm’s-length cash purchase within the past six months, a settlement statement showing no mortgage was used and no liens on the home.
- Timing: the purchase was within six months of the new loan’s disbursement date.
- Arm’s length: the seller was not a relative or business partner. A bank or HUD sale meets this.
- No financing at purchase: the settlement statement must show no mortgage was used.
- Clear title: the title report must show no liens.
- Documented source of funds: bank statements or loan papers showing where the cash came from.
- Ownership: you bought as an individual, an eligible trust, or an LLC or partnership you own 100%.
These rules are set out in Fannie Mae’s cash-out refinance guide. If you borrowed the cash from another source, such as a HELOC on a different property, the refinance must use the cash-out proceeds to pay that loan down.
How Much Can You Borrow with Delayed Financing?
You can borrow up to your documented initial investment in the home plus closing costs, prepaid fees and points on the new loan, within the cash-out loan-to-value limits.
That means you cannot take out more than you put in, even if the home’s value has gone up. Money spent on repairs after the purchase is not part of the initial investment. If you want to borrow against a higher after-repair value, you generally need to wait for a regular cash-out refinance. Gifts used for the purchase cannot be paid back from the new loan.
How Does Delayed Financing Compare with FHA?
Delayed financing compares favorably with FHA for cash buyers, because FHA cash-out refinances generally require 12 months of ownership and occupancy as a main home.
HUD’s Handbook 4000.1 sets those FHA cash-out rules. For this reason, most buyers who paid cash for a foreclosure use a conventional loan to get their money back. Investors who want to pull out more equity after repairs usually look at cash-out refinancing on a rental.
When Does Delayed Financing Make Sense?
Delayed financing makes sense when you can win a bank-owned home with cash, the home is livable or nearly so, and you want to recover most of your money within months.
It is a strong fit for buyers who use savings or a line of credit to compete with investors, then want a fixed-rate mortgage. It also fits the early stages of BRRRR financing on bank-owned homes. If the home needs major work before it can be financed, see financing a home that cannot get a mortgage first.
Example
The following is a fictional example. Paul buys a bank-owned house for $130,000 cash, beating two financed offers. He pays $3,000 in closing costs and moves in.
Four months later, the home appraises at $150,000. With delayed financing, he can borrow up to his $133,000 investment plus the new loan’s closing costs, as long as the loan stays within the cash-out limit for his property type.
FAQ
How Soon Can You Refinance After Buying a House with Cash?
Under Fannie Mae’s delayed financing exception, right away, as long as you are within six months of the purchase and meet the rules. After six months, the normal cash-out refinance rules apply instead.
Can You Use Delayed Financing on an Investment Property?
Yes. Fannie Mae’s rule is not limited to main homes, but investment properties have lower cash-out loan-to-value limits and higher pricing. You also need to meet Fannie Mae’s borrower rules.
Can You Use Delayed Financing If You Bought with a Hard Money Loan?
Not under Fannie Mae’s delayed financing exception, which requires that no mortgage financing was used for the purchase. A hard money loan secured by the home is usually refinanced as a regular rate-and-term or cash-out loan instead.
Does FHA Allow Delayed Financing?
Not in the same way. FHA cash-out refinances generally require that you have owned and lived in the home for at least 12 months, so most cash buyers who want their money back quickly use a conventional loan.
Sources
- B2-1.3-03, Cash-Out Refinance Transactions. Fannie Mae Selling Guide. https://selling-guide.fanniemae.com/sel/b2-1.3-03/cash-out-refinance-transactions
- HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook (Update 18). U.S. Department of Housing and Urban Development. https://www.hud.gov/sites/default/files/Housing/documents/40001-hsgh-Update-18.pdf
This page explains general loan rules and is not financial advice. Lenders set their own requirements, so confirm the rates, fees and terms with a lender before you apply.