Getting a mortgage after paying cash for a home
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!
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 situations, the real estate community will treat a cash offer as if the buyer 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 obtain financing for the purchase of the 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 financing on the home.
The rules for this cash-out loan 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). 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 who 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 they live in the home as their 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 impose given your credit, the type of home you are buying, the value of the home and so forth. With that information in hand, you'll have a better idea what you can and can't do once you pay cash for the home.
You may discover that lenders will give less than you might 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 ask about 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 ordinarily handles these transactions in your area.
Also, 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 with for the property.
Moreover, 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 finance 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 loans 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.
We think you'd better find out what those requirements are now before you pay cash for the home. 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.
(Ilyce R. Glink is the author of many books on real estate and host of "Real Estate Minute" on her YouTube.com/expertrealestatetips channel. Samuel J. Tamkin is a Chicago-based real estate attorney. If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11a-1p EST. Contact Ilyce through her Web site, http://www.thinkglink.com.)