How Deferred Financing Gives Home Buyers Money
In many areas, anyone who has tried to buy a home recently knows the pain of the shortage of supplies. Stocks are tight, prices are rising across the country and the competition is fierce. Cash buyers push back loan-dependent bidders, prompting buyers to find creative ways to make the strongest bids. One option is deferred financing, which allows buyers to make a compelling offer while borrowing money to buy a home.
What is deferred financing?
Deferred financing allows buyers to use cash, and in some cases stocks, to buy a house and get a mortgage after buying the house. Essentially, they are enjoying the benefits of being a cash buyer while also enjoying the benefits of using a mortgage as leverage.
Deferred financing arrangements are very similar to buying a house and making a refinancing of collection, therefore, you can expect to pay rates similar to the going rates for re-withdrawal.
The process for applying for deferred financing is similar to applying for a home loan. The borrower must provide the same financial information, proof of employment and undergo a credit check. Like a loan preselection, borrowers must maintain the integrity of their credit and employment situation between the time they buy the home and the time they get their mortgage.
However, this type of financing is not for everyone, and having a pocket of cash can be tempting for some people.
“One of the risks – and that’s just human nature – is that you want to make this house your own. You want to buy furniture and that sort of thing. So there’s a risk that they’ll put up a loan. extra to make changes to the house, “says Allen Seelenbinder, divisional sales manager for Bank of America.” So we just advise them to understand their debt ratio and their credit report. “
What types of buyers are best suited for deferred financing?
Deferred funding applicants ideally have access to cash or stocks and a set of trusted advisors. Buyers should have a conversation with a qualified loan officer, their financial advisor, and a lawyer or real estate agent about their goals and the risks of using this type of product.
“It’s an option, not a necessity, and it can be of great benefit to good customers,” says Seelenbinder.
In addition to liquid assets, buyers can leverage securities for deferred financing, Seelenbinder points out. Merrill Lynch, for example, allows buyers to take out a line of credit against their securities. There is no tax on capital gains because they do not liquidate them. This line of credit can be funded the next day.
“We have clients who buy a house for $ 1 million with title loans, come back to us and we do deferred financing at a percentage of that purchase price, and that pays off their line of credit and they get a fixed rate under the same conditions as if they were making a purchase transaction, ”says Seelenbinder. “And they are not affected by the additional fees like they would be with a refinance with withdrawal.”
However, some clients make the mistake of liquidating their assets, which could end up costing them a bundle of taxes. A common example, says Seelenbinder, is an heir who inherits significant stock and stock awards. These often have a low cost basis, which is the original value of an asset for tax purposes.
“Once they sell them at the current market price, that capital gain becomes a taxable event. If they use that money to buy the house, then, yes, we could do some deferred financing to get the money back; However, it could actually cost them more, ”says Seelenbinder. “In most cases, there are other ways for them to avoid or reduce these tax consequences, and a CPA or lawyer would be able to advise them on this. “
Advantages and disadvantages of deferred financing
Unlike refinancing with withdrawal, deferred financing does not have a six-month waiting period, a requirement before lenders write a mortgage on a newly purchased property. This means buyers can get their money back fast and lock in a rate. There are also no refinance withdrawal fees, which can be anywhere from 3% to 6% of the mortgage.
The downside is that if homebuyers wait too long for a mortgage after purchasing the home through deferred financing, they may face higher interest rates. In the current context of rising rates, this is a possibility.
“When you’re talking about larger loans, a rate hike of an eighth or a quarter of a percentage point can be big,” says Ben Dunbar, managing partner at Gerber Kawasaki Wealth and Investment Management in Santa Monica, Calif. .
Cash buyers also avoid other lender requirements. For example, they can buy a home that does not pass inspection, repair it within 60 days and still qualify for their mortgage. It’s common for people in some parts of the country, especially along the coasts and in vacation spots, says Seelenbinder.
However, buying a home that does not qualify for financing due to its condition can turn into a financial disaster.
“It’s a little worrying that people are buying a house with significant damage or structural problems with money, hoping to get a mortgage later. Unless you hire experts to inspect the home, they really don’t know what they’re buying, ”says Dunbar.
In this situation, it is essential to hire specialized inspectors, for example in construction or electrical work, to do a thorough assessment. The worst-case scenario is buying a property, finding the problems worse than you might think, and then investing more money to fix them. Worse, if you can’t afford the repairs, you might not get the deferred financing and you will lose access to your money.
However, deferred financing can ultimately help home buyers in tight markets compete successfully for homes because they are using cash.
“When sellers look at 15 offers on their home, you want to make the most compelling offer. This is why we are seeing more and more people using deferred financing, ”says Seelenbinder.
Although cash buyers are not required to purchase title insurance, It’s a good idea. One reason is that title insurance will detect any undiscovered lien. Another is the peace of mind knowing that in the rare event that there is a defect in the title, your investment in the home is protected.
How to apply for deferred financing
- Talk to your financial advisor, CPA and real estate agent to assess the risks and benefits. A deferred cash financing offer can help you stand out in a crowded market, but there can be consequences if rates rise or the home ends up in significant trouble. There could also be tax implications.
- Make sure you meet all the eligibility requirements for a mortgage, to include: having no close relationship or friendship with the seller; document the sources of the money used to buy the house; not borrow more than the purchase price of the house; and make sure the house has a clear title.
- Complete a mortgage loan application with a lender within six months of purchasing the home. Be prepared to include details about your finances and work history, and to undergo a credit check.