California – especially the Bay Area – doesn’t always play by the same rules as the rest of the country. So it’s no surprise to see Fannie Mae’s Delayed Financing Rule being used in our real estate market for, well, re-purposed purposes than it is in the rest of the country.
Fannie Mae enacted this rule in order to sell “unlendable” houses. (Think uninhabitable $10k homes in Detroit, not our $10k x $10k homes that could use a kitchen re-do in Danville!)
By using the Delayed Financing approach, a buyer can pay cash for a crumbling home that’s not worthy of underwriting, repair the home, then take out a mortgage and regain some of the capital used to make the purchase and improvements.
This rule wasn’t exactly applicable to the prosperous real estate market and gorgeous homes here in the Bay Area. True to our innovative nature, however, we clever Californians figured out how to make the rule work for us.
The two most common ways Delayed Financing applies here in the Bay Area are:
- To put their cash in other (more lucrative) investments instead of keeping it tied up in a home.
- To compete in a competitive, increasingly all cash real estate market.
Gil Faust, my friend and prominent Bay Area residential mortgage loan consultant, sheds light on how this national rule is being used slightly differently here in California in his recent blog post. Due to the specific market conditions in this part of the country, he explains, and combined with extremely low interest rates, its use is on the rise. Furthermore, he asserts that Delayed Financing is actually changing the mortgage industry.
“Smart homebuyers are taking advantage of a little-known refinance strategy, the Freddie Mac/Fannie Mae 2011 Delayed Financing Rule, to raise valuable cash for retirement, kids’ college funds, for emergency, to pay-off credit card debt, and even the stock market…At such low rates of interest, it’s smart to put your cash to work elsewhere in higher-earning investments.” – Gil Faust
According to Faust, “A resurgent IPO market, particularly in the Bay Area’s high tech sector, is allowing buyers to cash in their stock options and purchase residential property.” The market is also becoming increasingly competitive due to an influx of foreign real estate investors (the large majority from China) who are also paying all cash for homes (because of strict mortgage-lending rules for foreign investment plus the fact that they have the cash available).
Drawbacks of Delayed Financing:
- Not all lenders offer this option, and as a result,
- Rates and fees are not always as competitive.
Delayed Financing differs from a home equity loan in several ways:
- A home equity loan is a separate loan on top of your first mortgage.
- A cash-out refinance is a replacement of your first mortgage.
- The interest rates on a cash-out refinancing are usually, but not always, lower than the interest rate on a home equity loan.
- You pay closing costs when you refinance your mortgage.
- Generally, you don’t pay closing costs for a home equity loan.
- Closing costs can amount to hundreds or thousands of dollars.