Pay cash and get mortgage?

conchitaFLNovember 15, 2011

I'm a first-time would-be home buyer and I have a question about financing. In my part of FL the market is very, very bad right now and I'm seriously interested in buying.

However, it's clear that I would have to pay cash to get any kind of a deal. There are a lot of foreclosures but the banks will take a cash offer that is much, much lower than one that requires financing.

I have the cash to do this, but given that most foreclosures would also need a fair amount of reno work, I would be eating into my savings to an uncomfortable degree to do it all.

Is it possible these days to get a mortgage after purchase, or to apply for a mortgage before purchase if you're going to pay cash? Also, we're talking a very small amount here, possibly $30 to 40K at most. (I'm not looking to finance 80% or anything like that.) I seem to remember that in the pre-frenzy days the smaller the mortgage the harder it was around here to get one.

Would something like this be possible? As I say, I would be prepared to tough it out and pay cash for everything if need be, and given my druthers I'd rather hold off on renovations till I could easily do that, but the condition of most of the properties I've seen wouldn't give me that luxury.

And yes, I realize that prior to signing on the dotted line one can't be certain of actually getting funds despite a prequal.

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See the related thread a little further down the page. Short answer is yes.

Here is a link that might be useful: Thread on mortgage after buying

    Bookmark   November 15, 2011 at 1:23PM
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Thanks, weedyacres. Yes, I did see that thread, but I'm not really sure how it works. I would prequal, then when I found a property apply for a mortgage or wait till after purchase? Is it harder to get a mortgage on a property after purchase? Common sense would say it should be easier, but then common sense doesn't have a lot to do with many things in the housing market these days. :)

    Bookmark   November 15, 2011 at 1:31PM
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I'm the original poster on the thread referenced by weedyacres. Here's what I'd suggest: find a mortgage broker and tell him/her you want to get a loan on a house after closing. Give him/her a ballpark figure for how much you want to finance. based on the price range of the houses you're considering. Start the process of getting pre-approved for the mortgage amount you ultimately want to end up with. It will take a while because pre-approval requires much more documentation than pre-qualification. Make sure you keep up with the documents that are needed - keep asking your mortgage broker what else you need to provide, or what else the bank is asking for. Aim for a closing date of 30 days.

You should know soon enough how easy/difficult it's going to be for you to get a mortgage. It's better to learn of potential roadblocks up front than to go ahead with a cash sale and then find out you can't get financing.

If everything is on track with your mortgage, you then close your cash sale and kick into high gear on your mortgage. You press your mortgage broker to finalize the loan as soon as possible. Note that you have 90 days in which to refinance so that the interest can qualify for the mortgage interest deduction.

    Bookmark   November 15, 2011 at 3:14PM
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Thanks so much, annkathryn!

    Bookmark   November 15, 2011 at 3:58PM
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I see this is an older post but I wanted to send over some advice. Why would you pay interest on a loan if you have the cash? Many people will advise you to take out a mortgage for a tax deduction but they don't understand how taxes work. You will get your tax rate per dollar spent deducted from your income meaning if you are in a 20% tax bracket you only get 20 cents per dollar spent on interest adjusted to your taxes. Why do that?

    Bookmark   November 27, 2011 at 1:14AM
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"Why would you pay interest on a loan if you have the cash?"

Why would you spend every penny you have on a loan and leave your self cash poor?

You cannot borrow without income (except fro reverse mortgages that are age limited).

    Bookmark   November 27, 2011 at 9:59AM
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Hello, Bellamy. Here are the reasons:

1. At the price point I'm looking at, there will be some substantial repairs needed. The longer those are delayed, the more damage will occur and the more they will cost, so they should be done right away. Leaky plumbing is different from an ugly kitchen as far as how soon it must be dealt with. A nicer kitchen can easily wait till I get everything paid off. Structural stuff can't.

2. I'm not considering the mortgage deduction at all in deciding whether or not to do it this way, although I would prefer to do the loan as a mortgage so that it's deductible. If I'm paying some interest, why not have it be at least partially deductible, if it can be?

I know what you're saying, though. My mother had a friend who was fairly well off and her accountant kept urging her to pay off her older mortgage, which was at a higher interest rate. She wouldn't, because she wanted the deduction, since it was the only big deduction she had. That was silly.

3. Yes, I could pay cash for the house and for the repairs, but it would put me in a position where I would feel very uncomfortable if I had a catastrophic medical situation, for example, and the total cost of the mortgage over its lifetime at the current interest rate would be approximately $4K, plus whatever fees.

While it would be nicer not to have to put out that kind of money, to me it would be worth it to know that I could do this and still be set for emergencies and not making a huge dent in my retirement savings (I'm self-employed). I can live hand to mouth and have done that, but it's much pleasanter not to.

I totally hate debt, but I've looked at this from a number of different angles and in the long run I think that buying will be cheaper than continuing to pay rent, since I live in a winter resort area and the only places where rents are going down proportionately to the drop in sale prices are those where the owners are in pre-foreclosure and desperate for any income. I don't want to get into that kind of situation.

If my income level continues to be what it is now, I should be able to pay off the loan in four or five years at the most, and at worst I could scrape by on minimum wage and still make the basic payment as well as HOA, taxes, insurance.

If I could pay cash for everything, if I stayed 6 or 7 years I could give the place away at to charity at the end of that time and really not be out more than I would if I continued to rent the same amount of time. The mortgage interest means I would need another year or so to get to the same place.

    Bookmark   November 27, 2011 at 10:55AM
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"I'm self-employed"

That is going to be the sticking point. Do you have a several year track record in your current business in its current location? Most lenders are going through applications with a fine tooth comb, so you are going to need to prove your income. It is also likely that they will be willing to lend you less than someone with a "normal job". eg it is easy for most people to get a 80% loan just about impossible for someone who is self-employed. Those loans are generally capping out at 60-70%.

Also, if the dollar amount is small, it might seem like that is loan that lots of people would make - but it isn't. You might end up looking at a HELOC vs a mortgage. That isn't a big deal though since you have the cash on hand if variable rates really started to rise.

Also, the home has to be inhabitable for most conventional loans. "Leaking plumbing" won't disqualify you, but "no working bathroom" might.

    Bookmark   November 28, 2011 at 8:43AM
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Thanks, billl. I've been self-employed since 1985 and for the past ten years my income has averaged around $80K. My credit rating is good, only small ding is not enough open credit since I only have one credit card, but I've had that one for thirty years.

I'm not looking to finance more than 30 - 40% max. I know what you're saying about small loans being harder to get--I've had several friends who in the past were not allowed to put more than 20% down and had to just make sure there was no prepayment penalty, get the loan, and immediately pay off the difference between what they wanted and the larger amount they had to take. I've always thought that was bizarre, but I know that's how it works sometimes.

Actually my brother is considering holding the mortgage, since 4 or 5% is more than he can get otherwise right now for the next couple years anyway, and he'd be stuck dealing with it anyway if I got run over by a bus or something.

The least habitable units I've looked at (lack bathroom fixtures or appliances) are all things that would fall under the Fannie/Freddie Home Renovation mortgage since I'd be the owner/occupant, so that's also a possibility. Most of the ones I'm considering are in better shape than that, though. I have seen a few foreclosures that superficially only needed a coat of paint, although I figure on having to redo wiring and plumbing in any of them, even though there's nothing visibly failing just yet.

The one thing they all need is at least one new bathroom--they have those nasty 1980s beige plastic builder grade tubs that must be leaking by now, and even where people have done vanities nobody has bothered about tub replacement in any unit I've seen.

Just out of curiosity, I thought a HELOC was far more difficult to get these days than even a regular mortgage?

    Bookmark   November 28, 2011 at 12:34PM
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I think that the idea that HELOCs are hard to get currently is mostly just that most people don't have a lot of equity anymore. There are a lot of lenders still doing mortgages with less than 20% down, but I haven't heard of anyone offering HELOC's down to under 20% equity. Combine that with tougher appraisals and most people won't qualify anymore. However, if you have a recent sale setting market value and are talking at least 60% equity remaining, that is a doable loan.

Of course, if you can get traditional financing, you'll probably get a better rate that way. Given that you plan on paying this off in 6 years, your best rate is probably going to be a 5/1 arm and then just pay it down at your own rate.

    Bookmark   November 28, 2011 at 1:27PM
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