In 2011, Fannie Mae introduced to the mortgage market, the Delayed Financing Rule, effectively allowing a home buyer to pay cash for a property and then immediately re-mortgage that money back post closing on a new refinance transaction. Since 2011, Fannie Mae has been offering this product, but hasn’t had much effect in Sonoma County until now.
Originally, from the time you purchased a property with all-cash to the time that you could refinance, there was a six month seasoning requirement forcing you to hold the property for six months. This rule has been lifted, allowing one to purchase a house with cash and then cash-out refinance that money to purchase other real estate, replenish reserves, etc.
How the delay financing role facilitates a “buy and refi” in Sonoma County.
Let’s say you identify a bank owned property under $300,000 and the property is is in good condition. As a home buyer, you’ll need to be prepared for the following:
- 2nd mortgage loan pre-approval by a loan officer of that seller-for example Wells Fargo owns the property, you will need to get pre-approved with a Wells Fargo mortgage loan officer
- Multiple offers and strong competition
- Highest and best offer situation
- Bank expects a quick close of escrow
- Strong mortgage volume in the industry means thirty-day escrows are most likely
The Delayed Financing Rule will allow you to buy the house, without needing a second mortgage loan pre-approval because you are buying the property with cash. You won’t have to deal with a longer close of escrow or loan underwriting, so you can close escrow much faster, strengthening your home purchase offer. Multiple offers and steep competition can be reduced because the majority of these people are buyers with loan financing. Other buyers include other investors as well. By paying cash for the property, you literally remove many limitations in the the home home buying process.
The Delayed Financing Rule helps you efficiently buy and refi real estate. Remortgaging a free and clear property will have some unique loan qualifying parameters to be prepared for.
How to qualify using the Fannie Mae Delayed Financing Rule:
- The total new mortgage loan amount cannot be more than the documented amount of the borrower’s initial investment in acquiring the property plus the financing of closing costs, prepaid fees (taxes and insurance), and points. Simply put, you cannot purchase a house for $300,000, have appraised for $400,000 and have your new loan amount be $300,000. The new loan amount would be based on the maximum loan to value the lender requires on the $300,000 sales price. The loan to value parameters change based upon such factors as credit score, and occupancy i.e. primary residence, second home or investment property.
- The buy and refi original purchase must have been an “arms length” transaction.An arm’s-length transaction means that the relationship between the seller and the buyer is at an arm’s-length, no other relationship can exist between the two parties. If the seller of the property happens to be a limited liability company, the principles of the limited liability company must be documented. Usually LLC’s purchase distressed properties, rehabilitate the houses, and then resell them at a later date for a profit.
- The original purchase transaction must be documented by a final HUD 1, a.k.a. final closing statement. This document must confirm that there was no other mortgage loan financing used to acquire the property this includes private money financing and conventional mortgage loan financing. The title report must also confirm this information.
- The new loan to value on the remortgaging component of the transaction must be the lesser of the original sales price or a current appraised value.
- Paper trailing, yes you guessed it this was coming! The original source of funds for the purchase transaction used to acquire the property must be documented by any of the following; providing the bank statement, personal loan statement, equity line of credit on another property. In other words this money has to come from some bank account, “no” the money used for the transaction cannot have come from money sitting at home in a safe.
Mortgage Tip: if you originally purchased the property and there was gifts funds involved, or even a loan involved, that’s ok, these parties, get itemized on the final closing statement and are paid before you as a the borrower receive your net proceeds.
Thinking about the Delayed Financing Rule refinance? Contact a local mortgage professional who can walk you through the buy and refi program from start to finish. Get a free no obligation mortgage rate quote for your refinance. See How The Delayed Financing Rule Works: The Buy & Refi Solution can help you achieve your financial goals.