Delayed Financing: No-Seasoning Cash-Out Refinance

Conventional lenders typically make you wait six months to access the equity in a property that you recently purchased.

However, borrowers who qualify under the conventional loan delayed financing rule may be able to complete a cash-out refinance right away.

Highlights:

• Delayed financing allows you to do a cash-out refinance immediately after a cash purchase, without the usual six-month wait.
• It can be used for primary residences, second homes, and investment properties, including single-family and multifamily homes.
• You must show proof of purchase without a mortgage and have no liens on the property to qualify.
• Your cash-out is limited to the amount you originally invested plus closing costs.
• If you don’t qualify for delayed financing, a HELOC can be an alternative to access equity right away.

What Is the Delayed Financing Rule?

The delayed financing rule allows you to purchase a home in cash and apply for a cash-out refinance immediately after closing without waiting the typical six months.

You can use the delayed financing rule on your primary residence, second home, or investment property. Your purchase can also be a single-family residence, including condos and some manufactured homes, or a multifamily property with 2-4 units.

You don't necessarily need to have purchased the property in your name to use the delayed financing rule and get a cash-out refinance. You may also have bought it through an:

• Eligible trust where you’re both the grantor and beneficiary

• Eligible land trust that you’re the beneficiary of

• LLC (or partnership) in which you (or you and co-borrowers) have 100% ownership

Note: If you recently acquired a mortgage-free property through inheritance or court order, including as the result of divorce, you do not need to meet delayed financing guidelines. You’re eligible for a cash-out refinance with no required waiting period.

Who Might Use the Delayed Financing Rule?

Delayed financing allows buyers with sufficient resources to pay cash for a home, avoiding the lengthy mortgage process and then recoup their funds after closing.

Many home buyers can benefit from the delayed financing rule thanks to the wide range of properties eligible for a cash-out refinance under its guidelines.

Some common types of borrowers who may want to use the conventional loan delayed financing rule include:

Buyers of fixer-upper properties needing significant repairs that wouldn't currently meet lending standards could buy the property with cash, conduct necessary repairs, and then complete a cash-out refinance on the after-repair value.

This strategy is often used by investors who plan to hold the property as a long-term rental, but it can also be used by regular homebuyers purchasing their primary or second home.

Established homeowners with significant equity in their current home looking to downsize to a smaller, less expensive property. For example, someone who wanted to shed the responsibility of their four-bedroom house for the low-maintenance condo lifestyle.

In this situation, the homeowner would draw on the equity in their existing home, typically through a home equity line of credit (HELOC) or bridge loan to pay for the purchase.

Investors purchasing short-sale and otherwise distressed or highly-motivated properties. It's generally not practical (or even possible sometimes) to obtain a purchase loan for distressed properties. This can also apply to properties bought through tax and lender auctions.

These buyers typically fund their purchases with cash. By using delayed financing, they can quickly recoup their funds for the next investment.

Homebuyers with considerable liquid assets who want to make the most competitive offer possible. This strategy has been prevalent over the past few years as many markets have seen fierce buyer competition. When a property may only be listed for hours, having a no-contingency cash offer can maximize your chance of acceptance.

Anyone with cash on hand but poor credit or with errors on their credit report. This could be someone whose credit is currently too low to qualify for a conventional loan or a borrower hoping to increase their score to secure a lower interest rate on their mortgage.

The delayed financing rule would allow this type of buyer time to correct any issues on their credit report without missing out on the home they want or waiting the entire six months to do a cash-out refinance.

However, cash-out refinances are harder to qualify for, so anyone in this situation should seek an opinion from a lender about whether they will be approved for a future refinance.

Delayed Financing Requirements

Settlement statement: You must provide the settlement statement from your property purchase. It must confirm that the transaction was completed without any mortgage financing. In rare situations, documents such as a recorded trustee's deed may be accepted.

No liens on the property: The conventional loan delayed financing rule only applies when you don't have any mortgage or lien attached to the property. Effective April 2023, lending guidelines require you to wait 12 months to use a cash-out refinance to pay off an existing first mortgage.

Arm’s length transaction: You’re not eligible under the delayed financing rule if you purchased the property in a non-arm’s length transaction. This could include buying a home from a family member or employer.

Source of funds: Provide a documented source of the funds for the purchase. This might be:

• Bank statements

• Personal loan paperwork

• Documentation of a HELOC on another property

• Other types of lines of credit

If you purchased the home with cash received from an unsecured loan or a loan against another asset, any equity you’re cashing out must first be used to pay off or pay down those accounts. This could include HELOCs against your primary residence or investment property or a line of credit issued against your stock portfolio.

However, if you received gift funds to purchase the property, you are not allowed to use your cash-out refinance to repay the gifter.

Maximum Cash-Out Limit for Delayed Financing

Finally, even though cash-out refinances are based on the home's current appraised value, your cash-out is limited to the amount you invested when purchasing the property, plus the costs associated with your new mortgage.

For example, say you purchased a fixer-upper single-family home as an investment property for $250,000. If you made improvements, bringing its value up to $400,000, standard guidelines would allow you to cash out up to 75% of the house's appraised value, or $300,000.

But under the delayed financing rule, your cash-out is limited to the original $250,000 you invested, plus closing costs for your new loan. If those costs were $10,000, the most equity you could cash out would be $260,000. However, you'd be eligible to tap the entire $300,000 after six months of ownership.

Remember: Besides these delayed financing requirements, you will still need to meet standard conventional loan guidelines regarding your credit score, debt-to-income ratio, and other qualifying criteria.

What If You Don’t Qualify For Delayed Financing?

So what if you don’t qualify for delayed financing? Unfortunately, conventional lenders can’t approve you for a cash-out refinance without six months of property ownership if you don’t meet the criteria of the conventional loan delayed financing rule.

However, one alternative that can help non-qualifying buyers access their equity right away is through a HELOC. You can technically cash out your home equity through a line of credit right after closing, although some lenders may have their own required waiting periods.

Getting a Cash-Out Refi Under the Delayed Financing Rule

If you’ve recently purchased a home with cash and want to recoup your investment through delayed financing, apply with a qualified professional who can help you navigate the cash-out refinance process.

And if you’re considering purchasing a home with cash and looking at your options ahead of time, that’s even better. By starting the qualifying process today, your lending agent can help ensure you’re ready to go as soon as it’s time to submit your delayed financing loan application.