One thing the financial crisis has brought to home financing is close scrutiny of cash out home loans.

In fact, the home loan environment went almost overnight from an “anything goes” philosophy to a “what are you trying to pull” attitude!

Sometimes it feels like banks have tightened up their lending standards so much that they don’t want to loan money to anybody!

Except for a few far-sighted banks, that is.

a photo John King of Wells Fargo Bank's Private Mortgage Advisors Group

John King of Wells Fargo Bank

I sat down with John King of Wells Fargo Private Mortgage Bankers, a division of Wells Fargo bank for a candid conversation about the state of home lending today.

In particular, our conversation addressed the practice of buying a home with cash, then refinancing later to return the funds used to close back in an investment account.

This is a rather new technique used to buy distressed, foreclosed, bank owned homes, then take advantage mortgage interest deduction allowed from taxable income.

Here is a brief transcript of our conversation after we introduced ourselves:

Robert Lilley Brokerage: John, where do you see this type of financing as a true benefit to the Buyer?

John King PMA: In today’s distressed property market with home foreclosures selling on the courthouse steps, Bank owned homes and Short Sales are becoming the majority of our market.  Many sales are closing in aggressively with All Cash Buyers, but that cash often comes from investment accounts where it has been for quite some time.  Often, the pragmatic use of “cash” to buy a home initially gives way to a desire to return that cash to its original home in an investment account.  That is often what the Buyer wants ultimately to do.

RLB: Yes, “cash IS king” as they say!  I find it much easier to get my offers accepted if the Seller does not have to concern themselves with the Buyer qualifying.  I saw one deal recently where the purchase was over one million dollars cash – and that was the amount of the purchase deposit delivered with the contract to buy the home!

JK: Since Wells Fargo PMA deals predominantly with high net worth individuals, we see folks with lots of money in their investment accounts, cash accounts and even retirement vehicles that are willing to liquidate to buy the perfect home.

RLB: So the cash to purchase the home was merely a vehicle to get the offer accepted, not a long term strategy of ownership?

JK: That is correct.  Many of these buyers who have made these sacrifices with their coveted cash are looking for ways to place this cash back into their accounts where it will continue to grow.  That way, they end up with two investments; one in the home and one in their favorite equity market.

Unfortunately in today’s strict mortgage lending environment most Mortgage Bankers and Brokers are supplied by investors who follow Agency guidelines requiring 6 to 12 months seasoning of the current ownership in order to allow the buyer to pull his/her cash back out of the home.

RLB: So they must wait a full year to put their cash back into their investments accounts?

JK: Well, normally yes.  However, one of the specific niche products offered by Wells Fargo Private Mortgage Advisors does allow for a homeowner to recoup some of that cash without these minimum time frames.

In most cases, the loan can be done allowing up to 65% of the cash to be refinanced back out the day after the purchase closes.  For Example: If a buyer purchases a home for $650,000 cash and closes the transaction on March 2nd, The new loan can be originated on March 3rd for an amount of $422,500.00 as a Cash Out home loan!

RLB: Does the money have to be coming out of or going back into a Wells Fargo Bank account?

JK: No.  It does not matter where it comes from or where it goes.

RLB: So, a home buyer can buy a home for cash withdrawn from their investment account, close the home purchase, and put the money back into their investment vehicle as soon as the new loan closes?

JK: That is correct!  Now, the home buyer should be pre-qualified first to make sure they conform to normal guidelines before they assume that they can obtain this financing, and some limitations and/or fees may exist in withdrawing from their investment account.

These are things a buyer should always investigate BEFORE they enter into a home purchase expecting to use any type of financing.  As usual, the buyer should obtain a full estimate of all costs connected with a transaction of this type, including the costs of removing, replacing, or having the funds outside an account for any length of time.

They should also carefully examine the costs associated with any type of financing as they would on any purchase.

RLB: Yes, you want to know all of the costs before hand, just as with any real estate transaction!

JK: This does not always work for everyone, but for the ones that it does work for, it is another useful tool in making a real estate purchase, especially in this competitive market

RLB: Thank you, John!

John King can be reached at this Wells Fargo office by email where he is happy to provide more details on any loan program to help you decide if home financing is right for you.

John King of Wells Fargo Bank agreed to this interview with the understanding that any home loan programs discussed here may not be suitable for everyone and, as with all home financing, carries a substantial amount of risk. This is not intended to promote any particular Wells Fargo bank loan program or encourage anyone to employ any of the techniques described herein.

Wells Fargo Private Mortgage Advisors LLC, is an Affiliate of Wells Fargo Bank NA

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