If you have attempted to purchase a home recently you have felt the pain of supply shortage. Prices are up, inventory is slim and competition is fierce. In tough bidding wars, cash buyers are pushing out those dependent on a mortgage. These buyers are creative, inspired and come to the battle with the strongest offer. But is that bidder necessarily the wealthiest of the contenders?
Or, as I mentioned above, merely the most creative? Now there is something called delayed financing, which allows buyers to make a compelling cash offer up front, win the property and then secure financing.
Delayed financing begins by coming up with the funds to purchase the home in cash. Then, later applying for a mortgage loan by supplying financial information, proof of employment and credit check — just like a normal loan pre-qualification. But, as you would think, buyers must maintain their credit and employment status between the time they buy the house and when their mortgage is approved.
It is tempting for new homeowners to want to begin buying furniture or start landscaping, even remodeling, as soon as the purchase contract is signed. Quick spending as a new homeowner can present a risk of falling short on your debt-to-income ratio, and can even affect your credit report.
A viable candidate for cash now, with delayed financing to follow, has access to cash or stocks and really good advisors. These buyers take full advantage of their loan officer, financial advisor, attorney and real estate broker, knowing these are excellent sources to assist in determining their goals, benefits and risks. Of course, there are highly qualified buyers who are able to take out a line of credit against securities. Then, the smartest of these, after getting the deal today, will move forward with delayed financing tomorrow. There is no waiting period, so rates can be locked in immediately, rather than later when the chance of being subject to a higher rate might be likely. In this current environment, the signs are indicating higher rates are indeed possible.
In the cash buying arena, there is another consideration that can make or break the deal. Besides finding the cash to secure your offer, cash buyers must be sure the condition of the home they want to purchase is eligible for financing. It could be disastrous to purchase a home in need of repair or with structural problems with cash, hoping to obtain a mortgage later. If delayed financing cannot be secured, and it takes more cash to remedy the problems, the risk of losing access to all your cash becomes a real possibility.
But let’s face today’s market as it really is. When a seller is looking at 15 offers on their house, you want to be the most attractive one. Just remember, if you are that one, and you have put plans in place for delayed financing, be sure to purchase title insurance, even though your cash purchase does not require you to. Title insurance will detect any undiscovered liens and will provide you with peace of mind knowing that in the rare case of a title defect, your investment is protected.
In summary, if you are able, paying cash up front, followed by delayed financing, is the way to compete in a tight market. But first, consult your CPA, among other advisors. Make sure you meet all eligibility requirements for a mortgage, including: having no relationship to the seller; documenting the sources of the cash; not borrowing more than the purchase price; and ensuring the home has a clear title. Then the only step remaining is completing your mortgage application with your lender within six months after purchasing the home.
Delayed financing has become common. Consider the possibilities.
Jim Gay was a real estate broker for 20 years and has been a financial consultant to Fortune 500 companies. He is currently the NM Regional Director for The Jim Gay Group, Delmar Mortgage.