What is delayed financing and how can you benefit from it? Let’s discuss.

Every now and then, I meet with a homeowner who chose to make an all-cash purchase on their home. While there’s nothing wrong with buying your home this way, if you ever want to accrue debt on the property, my opinion is it’s best to start at the original point of purchase. Today I’ll tell you why, but I’ll also explain an alternative option: delayed financing.  

If, subsequent to your all-cash purchase, you go to a lender to take cash out of the property, your cash-out refinance rate will be a little higher than the original purchase-money rates. What’s more, the IRS will only give you a 90-day window to close on a cash-out refinance from your original purchase and reclassify the debt from equity indebtedness to acquisition indebtedness. The significance of which is your mortgage interest can’t be written off on an equity indebtedness loan.   

This is a conversation worth having with your CPA, but I’ll give you the gist: If you ever want to have mortgage debt on your property, start by financing your home from the get-go. However, if you’ve already bought your home in cash, it’s not necessarily too late. Your next best option is to do it immediately thereafter through a delayed financing mortgage, so you have the ability to deduct your mortgage interest come tax time. 

“The way you structure financing on the front end correlates with your likelihood for success on the back end.”

Now, I should point out that delayed financing loans can be tricky. For one thing, lenders have to source the funds from the original cash purchase—by far the most common issue that arises. In other words, the way we handle financing in a specific situation will depend on the source of the funds used to buy the home. For example, say the source was a secured asset like a brokerage line of credit or a home equity line of credit. In that case, the cash-out proceeds for the delayed financing loan must go directly to that particular creditor to pay back what was borrowed.  

It’s also fairly common for us to see situations where a third-party person has gifted the money to the original purchaser. Unfortunately, this will disqualify you from receiving a delayed financing loan. Based on Freddie Mac and Fannie Mae’s regulatory rules, it’ll be six months before you’re eligible for a cash-out refinance, which is, of course, problematic since you have just 90 days to receive the tax writeoff associated with acquisition indebtedness.     

The bottom line is the way you structure financing on the front end correlates with your likelihood for success on the back end. 

If you have any questions or you’re considering delayed financing for your situation, don’t hesitate to reach out to us first. We’d be happy to help you navigate through the complexities inherent in this type of loan. Talk to you soon!