Delayed Financing: Based on Purchase Price or Appraised Value?

Question

Hey everyone,

Brand new to real estate investing here (and in the process of buying my own personal home), but I've already discussed some future financing options with lenders. One option that came up is delayed financing, which sounds great, but one part confuses me. My lenders both stated they would do delayed financing based on 75% of cash purchase price of single-family investment home. So, you get the benefit of a quick mortgage but only get 25% of your investment back.

However, in reading about delayed financing here and other places, I've seen others say that delayed financing is either the lower of the purchase price OR 75% of the appraised value. So buying a property at its appraised value, you'd only get back 75% of your purchase price. But if you bought a property at 75% of market value, you could in theory get back 100% of the purchase price. A few questions:

1. Am I reading that correctly? Fannie Mae guidelines state: "The new loan amount can be no more than the actual documented amount of the borrower's initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points on the new mortgage loan (subject to the maximum LTV, CLTV, and HCLTV ratios for the cash-out transaction based on the current appraised value)." That would lead me to me to believe that it can in fact be based of appraised value, however both of my lenders seemed pretty clear that their delayed financing is 75% of my purchase price, and they didn't mention appraised value.

2. I've also seen people claim they wrap rehab costs into the HUD-1. That would allow delayed financing to be based on purchase price (including rehab) OR 75% of ARV (which is higher due to rehab), meaning the potential exists to pull out 100% of purchase price PLUS rehab. Correct?

3. What's the process for adding rehab costs to HUD-1 (if that is in fact possible)? If I buy property through county foreclosure auction, does that leave any opportunity to add rehab costs to HUD-1?

Really appreciated any and all insight as I look into these creative way to get into property investing! Thanks!

Andrew Postell · Answer

@Eric Helder this is often a very confusing subject. I have a couple of things to say about this:

1. If you are buying your PRIMARY home then delayed financing should be avoided at all costs....unless money is not an object to you. This is because a single family primary home can be purchased with 5% down or even 3.5%....so leaving 25% equity in a property is a huge disadvantage.

2. With investment properties Delayed Financing comes into play if you are buying entirely with CASH. If you are NOT buying with cash....then delayed financing does not apply.

3. When purchasing an investment property with cash you should avoid delayed financing AT ALL COSTS. The reasons for this is because you will be limited to the purchase price OR 75% of ARV....whichever is LOWER. So this is a restriction to us. And using delayed financing also carries a higher interest rate. So it's a double-whammy.

So how do you avoid it? Read the post I wrote on the subject HERE. We've been using that technique for years now and it has worked out very well. Let me know if you have any other questions. Thanks!

Delayed Financing: Based on Purchase Price or Appraised Value?

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