The conventional (FNMA/FHLMC) cash out delayed financing exception program seems to carry a lot of misinformation with the program. I think the reason behind this top mistake this is not a widely used program. Unless you work at a lender where the sales staff has a good clientele of rehabbers or investment property purchasers, you may not see this program.
Before we review the top mistake I have found in underwriting, let us review the basics of the cash out refinance delayed financing exception.
What is Cash Out Delayed Financing?
When a borrower requests a cash-out refinance they must be on the title a minimum of six months from the date of purchase to the date of closing. If they have not been on title for 6 months if they qualify they can use the delayed financing exception listed in the guidelines. For all cash-out delayed financing transactions, the underwriter must complete the following steps
- Confirm the borrower has no mortgage liens on the property by reviewing title
- Confirm all the sources of the funds used to purchase the subject property
(These funds can be cash on hand, personal loans, or secured loans (on other real estate or tangible property)) - Follow all standard rules for cash-out refinances listed in FNMA B2-1.2-03 and FHLMC 4301.5
The #1 Mistake:
The underwriter sets up the transaction using an LTV that is based on the original purchase price of the property.
This method is not used for this loan type, instead, you have to do some research and comparisons to determine the maximum LTV.
The LTV is always based on the lessor of the current confirmed and accepted appraised value OR the confirmed amount of funds contributed by the borrower to close the original transaction.
Example
For example, if the borrower purchased the subject property for $70,000 and completed $20,000 in renovations after purchase. The appraiser puts the fair market value at $120,000 and does a great job explaining the increase in value since the last purchase. During the underwriting review, it is confirmed the borrower needed $75,000 to close the original transaction. The borrower contributed $50,000 from their savings account and received a gift from his/her brother of $25,000 to complete the purchase of the transaction.
Let’s work on the math in this scenario…
Here is how the underwriter should determine the LTV based on that example scenario
$120,000 Appraised Value
x 80% Example max LTV on a SFR primary residence
$96,000 LTV Max
Compared to the amount contributed by the borrower
$70,000 purchase price of the subject
$5,000 closing costs and pre-paids to close subject
$75,000 Total to close the loan
$75,000 Total to close loan (as noted above)
$50,000 Confirmed from the borrowers own funds
$25,000 Confirmed as a gift to the borrower
Since the borrower’s confirmed funds are $50,000, we use that in our calculations.
Note that the $25,000 gift cannot be factored in this calculation.
$50,000 is maximum loan amount for the transaction OR LTV of 41.66% since $50,000 is the lessor of $96,000 and $50,000
As you can see meeting the LTV is not just one simple math formula, it requires research and comparing the two numbers to get the right answer. This training is another example of the practical training you can receive by joining the UberWriter 10 Point Underwriting Process certification program launching in 2018. We have taken the process of underwriting a file and not only provide the knowledge for topics like this, but the step by step method to effectively underwire any loan.
That is all for today, our team at UberWriter wishes you a safe and happy Thanksgiving Holiday! Go enjoy time with the family!
15 Responses
I’m selling a property and entering a 1031 exchange. With the proceeds of this property ($400k) I’m buying a condo with this cash (condo property is $400k). When doing a delayed financing down the road, does the 1031 exchange has any effects?
Hello
The source of funds you are discussing is fine and will qualify for delayed financing rules. The only thing I want to caution you on is that the property you are buying with 1031 money must be financed as an investment when you are ready to apply for a loan (1031 money is only allowed to be used for the purchase of 2nd home or investment). Make sure you keep your documents on how you paid for the subject (the 1031 papers), part of delayed financing is sourcing the money used to buy the subject.
Thanks!
Fannie Mae requires 6 months seasoning for cash out. Can this be 180 days or interpreted as 6 calendar months? Purchase closed 3/16/18.
Hi Michael
Fannie Mae counts actual days, a hand way to get the exact day you can close on is a windows machine has a built-in calculator. One of the functions of that caluclators is “number of days” determination, so you can put in the date of closing and the date you are signing the note and confirm it is 180 days or more.
Thanks
Michael
Hi Michael
Fannie Mae counts actual days, a hand way to get the exact day you can close on is a windows machine has a built-in calculator. One of the functions of that caluclators is “number of days” determination, so you can put in the date of closing and the date you are signing the note and confirm it is 180 days or more.
Thanks
Michael
Could I buy a property using my parents money and use 6 month delayed financing to buy them back assuming I would only being pulling 70% of the appraised value? What are the down sides of doing a transaction such as this, other than using someone else money for the initial payment.
Thanks
Hi Alex
The program requires that you document the source of the funds used to buy the home if you plan on refinancing in under 6 months. Over 6 months you could do what you’re suggesting as a cash-out refinance.
My grandmother owns a 4 unit property. She wants to do a cash out refinance to fix the property up so she can raise the rents. She does not qualify for the refinance based on her income. I am going to co-sign for her. She lives in the property. I do not. Would this be a delayed finance situation, or would I just be going on as a co-signer?
Hi Jay
This is not a delayed financing situation, this would be primary residence cash-out refinance since the primary borrower (your grandmother) lives in the subject and will remain in the subject. You will be a cosigner and your income and debts combined will be used to evaluate the ability to qualify for the loan. Hope that helps!
Thanks for the info. I spoke to an investor that claimed to have placed the estimated amount needed to rehab a home on the settlement statement of the original purchase. He said that since it was on the original statement, he could pull it out using the delayed financing exemption avoiding having to wait the traditional 6 months. I have a home under contract that should be rehabbed and rented in under 2 months and would like to do the same. Do you think this will work? Thanks.
We purchased an investment home using our personal funds and some of the wedding gift funds we had recently received. The rental property is currently owned free-and-clear. 7 months after our initial purchase we would like to do a cash-out-refinance. Does the use of some gift funds in the initial purchase effect our cash-out-refinance or is this simply a cash-out-refinance based on the newly appraised value since it has been more than 6 months?
Hello, I am running into conflicting information when I talk to various lenders (BofA, Regional banks, etc.). If my parent purchased a property for me all cash but the title is in my name and there are no liens, am I able to get delayed financing and place a traditional 15/30 year fixed rate loan on the property and use the proceeds to make my parent whole? I’ve heard some say there is a 6 month seasoning period but I’ve also been told that this can be waived since no loan was used. Nobody has mentioned anything to me about the source of the funds as being a reason for the 6 months though so I am confused. Thank you
Hi Mike
You can not get a delayed financing cash out, one of the rules is that if you bought the home you must source that funds. In this case, it sounds as if the funds are all “gift” (your parents paid for all the home) the delayed finance rule does not allow repayment of gift funds, only borrower saved funds OR if you borrowed on the funds (not a mortgage)
Hope that helps!
Thanks for this. Very informative. Does Hard Money Loan count as cash for a delayed financing. Is this a good sourcing to go back and refinance to get out of that position.
Hi Marouane,
Thanks for the question, I sent you a direct email back on your question!