When it comes to buying a new home, there are usually only two ways to go about it –– plunk down a wad of cash or take out a mortgage.
But what if you could do both?
That's how wealthy house hunters and real estate investors in coastal markets like New York and San Francisco have learned to cope with increasing competition. MarketWatch's AnnaMaria Andriotis reports:
"It’s called delayed financing, in which buyers pay cash for a home and then take out a mortgage soon after closing. Rarely used even two years ago, experts say it has picked up over the past 12 months....
After the deal is done, these buyers also want to regain some liquidity. So they get a mortgage and, in some cases, stash this money in investments that might have higher returns than what they pay in mortgage interest. Other options: They might use it to purchase another property or to simply bolster their cash cushion."
The strategy has gained traction since 2011, when Fannie Mae eliminated the six-month waiting period preventing new homebuyers from taking "cash out" on homes immediately after borrowing.
It's not hard to see how it could be appealing. Housing markets have been flooded with real estate investors and homebuyers alike looking to snap up steals on properties sold for steep discounts due to the housing crisis.
"I always tell buyers they're not gonna play with these boys," says Zillow.com real estate expert Brendon DeSimone. "It's the big leagues. They're men with cashier's checks and they're fighting for these homes. They treat them like stock, like candy."
And in the thick of competition, there's no denying cash is the ultimate trump card–– especially when the majority of homebuyers are relying on loan financing.
Still, there's some red tape to consider before taking the delayed financing route:
Real estate expert and blogger Dan Green highlights a few rules to consider:
- The new mortgage may not exceed the documented property purchase price
- The original purchase must have been arms-length
- The original HUD-1 must document that the sale occurred
- The original HUD-1 must confirm that no financing was used
- A title search must show that no liens exist on the property
- Funds used for original purchase must be documented