Here’s the information about how to use a mortgage after a cash purchase to capture the home interest deduction. It appears to me that this PDF is for returns for 2017, and that another version will probably come out based on the new tax laws, showing the loan limit of $750k for new home purchase debt.
The way this typically works is that a buyer who is able to purchase with cash will do so for competitive advantage, and can apply for the loan at any time before the offer or up to around 60 days afterwards. We will then underwrite the loan as though it were a purchase loan (not considered cash out on some programs), and deliver loan proceeds back to the buyer when the loan funds, minus closing costs.
Things to know about delayed financing/technical refinance:
1. All sources of funds must still be documented using bank statements prior to the cash purchase, with paper trail of any large deposits into those accounts for 2 statement cycles.
2. Most programs allow some gift funds to be used toward downpayment even if remainder is purchased in cash.
3. We will require a copy of the final settlement statement from the cash purchase as part of the loan underwrite to show that there was no financing involved in the original purchase.
4. Client still must qualify for the loan in the same way they would have for a regular purchase loan.
5. Some programs allow funds from a family member to be used for cash purchase, and returned as proceeds of the delayed financing. However, if a deed of trust is recorded against the property the refi will be considered a non cash out refinance if used just to pay off that debt, or cash out.
6. If a cash purchase is made and improvements made, some programs allow the original purchase plus cost of improvements to be paid back with the refinance, as long as the improvement costs can be thoroughly documented.
7. Always consult a tax advisor with questions about how the tax law will apply to the clients’ individual situation.
From IRS website: https://www.irs.gov/pub/irs-pdf/p936.pdf
Mortgage treated as used to buy, build, or improve home. A mortgage secured by a qualified home may be treated as home acquisition debt, even if you don’t actually use the proceeds to buy, build, or substantially improve the home. This applies in the following situations.
1. You buy your home within 90 days before or after the date you take out the mortgage. The home acquisition debt is limited to the home’s cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). (See Example 1 later.)
2. You build or improve your home and take out the mortgage before the work is completed. The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage.
3. You build or improve your home and take out the mortgage within 90 days after the work is completed. The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage. (See Example 2 later.)