It wasn’t long ago that you had to wait several months after the purchase of a property (investment or owner occupied) to get your money back out of the property by doing a cash-out refinance transaction or getting a home equity line of credit. In early 2014 that all changed, but many investors don’t even know that this type of financing exists.
Fannie Mae, the leading source of mortgage credit in the United States, changed their requirements on seasoning for all conventional mortgage loans. Again, investment or owner occupied. So what does that mean for you as an investor? It means that you can immediately start a refinance transaction the day after your purchase closes without having to wait any length of time before doing so.
Think about that for a second. You as an investor can now get a bunch of your cash out of the deal (albeit not all of it) immediately after the close of your initial purchase escrow.
What I Like About This Loan
As the saying goes, “cash is king.” This statement holds especially true with investment real estate on the buy side of a transaction. Cash gives you leverage in a deal. Cash gives you the opportunity to close quickly.
When multiple offers are out on a property, cash deals may afford a lower asking price, but still win out because of this ability to close quickly. Realtors love all cash deals because they think of fast paychecks. Quite frankly, everyone involved wants all cash deals for the same reason: the ability to close quickly so everyone gets what they want.
The buyer gets the property. The Realtors get paid. The escrow officers or closing attorneys get paid. The seller gets paid. Everybody wins.
Delayed Financing at Work (The Steps)
Oftentimes it’s difficult to wrap your brain around how some of these loan products work. The possibilities are endless and can often create analysis paralysis. We’ve all been there before — we can visualize what it is that we need to do in order to do something, but we come up with questions and objections in our head as to how not to do something. We over-analyze, and it creates a paralysis of the mind.
What I’ve done for you below is to lay out what I think would be a great step-by-step process for you to be able to use this creative financing strategy to purchase (and subsequently refinance) your investment properties using the cash that you have available, your good credit, and your solid income to obtain properties.
- As an investor who has cash (or access to cash through other means like a partner), go out and talk to some of your local lenders about delayed financing. Not everybody has this product, so you’ll most likely have to find a broker who has this niche product in your portfolio.
- Find an investment property that you can purchase with all cash. You’ll most likely want buy and hold properties for this strategy, so make sure your numbers still look good even if you add in the debt service (new loan). Close on it quickly with all of your cash. Remember that cash gives you the upper hand in negotiations with sellers and their agents. If you can’t get the terms you want by purchasing at a discount, then move on to the next one until the numbers work for you.
- Immediately after the initial transaction is done, apply for delayed financing with the local lender. This shouldn’t take more than 30 days to complete the entire transaction, especially if you’re prepared.
[See my first two articles on the BP blog to figure out exactly what it is that you need when applying for a traditional mortgage loan for investment property.]
- While your first investment property is going through the refinance loan process using the delayed financing, find another property less than or equal to the amount of money you can take out. Typically, a lender will allow you to cash out 70% of the appraised value of the property. This applies to the delayed financing as well. Again, make sure the numbers work for cash flow after the debt service is in place.
- When you get your initial money back from the first delayed financing transaction, move quickly on the second property you’re looking at. Use the cash you’ve obtained to purchase the first property and close quickly on the second property.
- Repeat steps 1-5 as many times as possible using the delayed financing. There are limits to the number of financed properties, but I would imagine that you’d be able to do this once or twice and be successful at adding properties to your portfolio.
How Fannie Mae & Lenders Underwrite Delayed Financing
Traditional underwriting guidelines for Fannie Mae loans still apply, and some lenders may place overlays on these restrictions, but for the most part you can still get cash out of a deal. The delayed financing loan system works for all residential properties from 1-4 units. So if you wanted to buy a series of 4-plexes using this method, it is possible. (In fact, I kind of like the idea of buying 4-plexes using this method: more units, more cash flow per unit.)
Here are the basic underwriting guidelines according to Fannie Mae:
- The original purchase was an arm’s length transaction.
- The borrowers must meet Fannie Mae’s borrower eligibility requirements. You can look these up online if you really want to know. Otherwise, let your loan officer worry about it.
- The original purchase was documented by a HUD-1 Settlement Statement which confirms no mortgage financing was used to obtain the subject property. This is standard for just about all residential loans.
- The sources of funds for the purchase transaction were documented. Make sure you have a paper trail if the money has been in your account less than two months. If you’ve had the money more than two months, you most likely won’t have to worry about the paper trail, but you’ll still have to document where it came from (like a savings account, checking account, etc.).
- The new loan amount, with the cash-out refinance, cannot be more than the actual documented amount of the borrower’s initial investment in purchasing the property. In other words you can’t take out more money than you used to obtain the property.
- All cash out eligibility requirements are met with exception to the continuity of obligation, which need not be applied. The continuity of obligation means that one of the borrowers on the existing mortgage is also a borrower on the new mortgage secured by the subject property. Again, this isn’t something you have to worry about.
Overall, the delayed financing system tends to be very under-utilized by investors for purchasing investment property. If you have the correct system in place to find a great lender or broker who understands what you’re trying to accomplish, the delayed financing strategy should work well for you going forward to help you finance your investment property in a creative way.
What about you? Have you ever used delayed financing in your real estate investing endeavors?
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