Delayed Financing - Cashing Out on an Investment in Under 6 Months
By Christopher Levarek
Today we’d like to discuss an available financing method for pulling cash out of investment on the refinance in under 6 months. A common restriction on refinancing a property with Fannie Mae or Freddie Mac financing is the need to allow seasoning of the investment or a 6 month term between the purchase and the refinance date. So for example, if a property is purchased on the 1st of January and renovations are completed the 1st of March, the investor or purchaser would have to wait until the 2nd of June(6 months & 1 day) of the same year before an application for refinance paperwork could even be submitted for agency financing or Fannie Mae/Freddie Mac backed loans.
Now, why would an investor wish to pull out all investment funds as soon as possible? Most likely said investor would be following the model of “BRRRR investing” as coined by Bigger Pockets or interested in high liquidity of their cash coupled with a higher ROI then the stock market might offer. Being able to have cash returned in under 6 months would allow an investor to invest in multiple investments as desired or even scale the number of investments owned in a shorter time frame using the same cash investment.
What is Delayed Financing?
In order to achieve this, the tool in the tool belt to use is called “Delayed Financing”. What is Delayed Financing? A delayed financing transaction is when someone takes cash out on a property immediately in order to cover the purchase price and closing costs for a property which was previously bought with cash. How does this work?
Example:
1) Investor purchases a property with cash for the purchase price + renovation costs.
2) Investor works with bank or lender for a Cash-Out refinance on the property upon completion of renovations.
3) The property is financed for 100% of the invested cash(purchase + renovations) OR up to 75% (SFH) or 70%(1-4 units) of the current appraised value.
4) Investor uses returned funds for another investment
What are the Requirements?
According to Fannie Mae, borrowers who purchased the subject property within the past six months (measured from the date on which the property was purchased to the disbursement date of the new mortgage loan) are eligible for a cash-out refinance if all of the following requirements are met.
Requirements for a Delayed Financing Exception:
The original purchase transaction was an arms-length transaction. For this refinance transaction, the borrower(s) must meet Fannie Mae’s borrower eligibility requirements as described in B2-2-01, General Borrower Eligibility Requirements. The borrower(s) may have initially purchased the property as one of the following:
a natural person;
an eligible inter vivos revocable trust, when the borrower is both the individual establishing the trust and the beneficiary of the trust;
an eligible land trust when the borrower is the beneficiary of the land trust; or
an LLC or partnership in which the borrower(s) have an individual or joint ownership of 100%.
The original purchase transaction is documented by a settlement statement, which confirms that no mortgage financing was used to obtain the subject property. (A recorded trustee's deed (or similar alternative) confirming the amount paid by the grantee to trustee may be substituted for a settlement statement if a settlement statement was not provided to the purchaser at time of sale.)
The preliminary title search or report must confirm that there are no existing liens on the subject property.
The sources of funds for the purchase transaction are documented (such as bank statements, personal loan documents, or a HELOC on another property).
If the source of funds used to acquire the property was an unsecured loan or a loan secured by an asset other than the subject property (such as a HELOC secured by another property), the settlement statement for the refinance transaction must reflect that all cash-out proceeds be used to pay off or pay down, as applicable, the loan used to purchase the property. Any payments on the balance remaining from the original loan must be included in the debt-to-income ratio calculation for the refinance transaction.
Note: Funds received as gifts and used to purchase the property may not be reimbursed with proceeds of the new mortgage loan.
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).
All other cash-out refinance eligibility requirements are met. Cash-out pricing is applicable.
We also recommend reading the following blog post "All About Delayed Financing........ Cashing Out Prior To 6 Months.“ by Jerry Padilla for some further information on the loan requirements.
In Summary
Although the requirements for Delayed Financing can be hard to satisfy at times, it is another option to be used when needed. We highly recommend consulting an operator or investor familiar with this investment strategy or reading further into the topic to avoid any surprises on the refinance. Invest Smart!