Fannie-Mae’s Surprise for All Cash Buyers

Wednesday, July 13, 2011

Fannie Mae quietly made a rule change last week that could be of huge significance for cash buyers of houses -- whether they're investors or owner-occupants -- starting immediately. Call it cash-outs for all-cash players.The company modified its long-standing requirement that all-cash home purchasers must be on the title for at least six months before pulling out money from the house by obtaining a mortgage.

Now you can do it -- if you qualify -- virtually overnight. Under Fannie's new "delayed financing" option, buyers paying cash to gain a competitive advantage -- lower prices, cleaner and quicker deals than purchasers requiring financing -- can now turn around and pull out substantial money from the transaction shortly after settlement. Given the growing role of all-cash purchases in many markets, Fannie's change could create new opportunities for players in the bank-owned, foreclosure and short-sale segments, including small-scale investors and ordinary buyers who have access to ready cash.

Fannie Mae's rule change allows some of these all-cash purchasers to tap their equity and put it to work elsewhere -- perhaps buying additional real estate. Of course, there are some limitations and restrictions:

The mortgage cannot exceed the documented amount of the borrower's initial cash investment in the house to be mortgaged. That's no matter how much you subsequently invest on remodeling improvements.

The all-cash purchase must have been arm's-length, with no conflicts of interest among the parties.

The purchase must be documented with a HUD-1 confirming that no financing was involved (i.e., there's no existing mortgage lien on the property).

The sources of funds used for the all-cash purchase must be documented, including bank statements, personal loan documents or a home equity line secured by another property. But to the extent that loans were used for the cash transaction, they "will be required to be repaid on the new HUD-1.

"The loan-to-value (LTV) limit follows Fannie's rules for cash-out refinancings. Generally, it's a 70 percent LTV limit, but for owners of two to four investor units the maximum LTV limit is 65 percent.

All of Fannie's regular underwriting, credit and documentation requirements for cash-out refinancings also apply.In its guide change on June 28, Fannie offered no rationale for liberalizing its rule out of the blue.

A Freddie Mac spokesman, Douglas Duvall, said in an email that his company not only is retaining its six-month seasoning rule, but "we are not considering a change to this requirement.

"Fannie Mae spokeswoman Amy Bonitatibus said that her company is making its change to serve the growing number of purchasers making all-cash offers to obtain advantageous pricing.