Buying real estate for cash is now a big part of the real estate marketplace. The National Association of Realtors says that all-cash transactions represented 35 percent of all existing home sales in February.
But what if the all-cash buyer wants to get, well, cash out of the property? Is that possible?
Refinance All-Cash Purchases
The answer is yes. Fannie Mae, for example, has a "delayed financing" program for those who paid cash for real estate and later decide they want folding money secured by the property.
The rules for a delayed financing are complex, but here are the basics which must be met before a lender can sell a loan to Fannie Mae.
- The property has to be bought for cash. An all-cash purchase must be documented with the HUD-1 from settlement or similar paperwork. The purchase must have been an arm's-length transaction, meaning not a property bought from a close relative. The purchase must have occurred with the past six months.
- There has to be a new title search to show that no financing has been secured by the property since it was purchased.
- Borrowers have to show the source of the funds used to purchase the property, say cash from savings or funds from a home equity line of credit (HELOC). In other words, if money from a home equity line of credit was used to buy the property a delayed financing loan can be used to pay back the HELOC.
- New financing cannot be used to pay off gifts. "Funds," says Fannie Mae, "received as gifts and used to purchase the property may not be reimbursed with proceeds of the new mortgage loan." If someone wants to refinance to pay off a gift then plainly the "gift" was nothing but a deferred loan.
- The amount which can be borrowed is limited to the borrower's initial investment plus closing costs, prepaid fees, and points on the new mortgage.
- The borrower must have a credit score of at least 720.
- The amount of cash that can be taken from the property is equal to as much as 70 percent of the purchase price if the loan is a fixed-rate mortgage or 60 percent if the borrower selects an ARM.
Refinance Either a Residence or Investment Property
In other words, you can get money out of an all-cash transaction but not all the money you put in. Borrowers who really want to maximize financing will probably be better off when, if qualified, they buy with a purchase money mortgage in the first place, say an FHA loan for a prime residence with as little as 3.5 percent down, a conventional loan with 5 percent down or with VA financing and nothing down.
The effect of a delayed financing is to give the all-cash borrower -- whether a residential or investment buyer -- a little wriggle room if they decide equity in a property is better used elsewhere. For more information regarding delayed finance mortgages speak with lenders for all the details.