By: Ilyce Glink and Samuel Tamkin
Q: I just read your very informative article on the competitive market and cash offers. I’m a part-time real estate agent and real estate investor and a part of your article really intrigued me!
I’m looking to buy a condo for cash in the next month or so, but I never knew that I could then get a mortgage on the property. How would that work? Is it a common practice? What would be the mortgage process? Would the lender pay me monthly or do I get a check at the beginning of the process for the full amount that I’ve paid, and then pay a monthly mortgage? I’m really interested in doing this.
A: When you place an offer to purchase a home, you can elect not to have a financing contingency in the offer. That means that you must buy the home whether you obtain financing for the purchase or not. As long as you come to the closing and close, the seller should be happy.
In most home buying situations, the real estate community will treat a cash offer as a buyer that doesn’t need financing to close on the home. If the buyer fails to close on the purchase, the buyer may lose any deposit paid under the contract. Unless the contract specifically states that the buyer does not require financing, will not obtain financing, and that the closing on the purchase of the home will not include a lender, you can usually still refinance after the purchase of a home.
Having said all that, if you have the cash on hand and you either don’t want to deal with a lender or don’t have enough time to deal with a lender to get a deal closed, you can simply close on the home. Once you own the home, you’d apply with a lender for cash out refinancing on the home.
The rules to refinance after buying a home with cash may be a bit different and the lender may not give you the same amount you otherwise would have gotten through a loan at the time of the purchase, but you can still finance the transaction.
You ordinarily will get a lump sum check at the closing for the proceeds from the loan. The lender won’t set up a monthly payment to you (you’d have to figure out a way to annuitize that lump sum) and that option generally would only be available to you if you were 62 years or older and obtaining a reverse mortgage.
(Reverse mortgages generally allow older homeowners that have significant equity in their homes to receive either a lump sum at the loan closing or a monthly check for a certain length of time or as long as you live in the home as your primary resident.)
We don’t think you’re asking about reverse mortgages. Therefore, you need to talk to a mortgage lender or mortgage broker to determine what requirements they would have for you given your credit, the type of home you are buying, the value of the home and find out about any other requirements they would have to get the loan after closing. With that information in hand, you’ll have a better idea what you can and can’t do after paying for your home in cash.
You may find out that lenders will give less than you might otherwise have wanted or that they have other restrictions for giving you the loan. The lender will take a closer look at the purchase of the home and may even inquire as to the source of the funds you used to purchase the home. The lender may also want to see that you closed through a title agent or other closing agent that they might know ordinarily handles real estate closings as other closings are handled in your area.
One issue you might find different is that some lenders may not quote you the same rates or terms that you might otherwise get if the property was financed at the time you purchased it. In some cases, you might only be able to get a loan of up to 70 percent of the value of the home. That value may end up being whatever the bank’s appraiser comes up for the property.
Also, some lenders may have timing requirements relating to when you can get financing on your purchase after you’ve closed. In some cases, lenders will want to refinance you as soon after your purchase as possible to still consider the financing as part of the original purchase. If you wait too long, some lenders will add additional obstacles to your obtaining cash from the property.
In 2011, Fannie Mae changed a rule that required cash buyers to wait six months before obtaining cash from a financing situation like yours. Now they allow loan to buyers, even if they purchased the home with cash, if they obtain the loan within six months of that cash closing.
Rules are subject to change and there will be other restrictions you must abide by to conform to Fannie Mae requirements. Your mortgage lender or broker can give you more information on how soon you can refinance after buying a home with cash.
We think you’d better find out what those requirements are now before paying for the home in cash. One thing to remember is that the property you purchased for cash will still need an appraisal before a lender will agree to finance your property, and it’s entirely possible the appraiser may come up with a different value for the home and that number may be significantly less than what you paid. That lower appraisal will directly affect the amount of money you can get from a lender.