Buying a new residence: how to do it in retirement

[samclem]

Okay, this is probably a simple question, but it's my first time around the block.

My MIL is retired and considering a move. She'd be selling her (paid for) house (approx $150K) and buying another with a slightly lower value. What's the smartest way for her to do the financing (that is, buy the new house while waiting to sell her present house). Her only "income" is a SS check of about $1500 per month, so I'm guessing a conventional mortgage is a nonstarter.
Options that occur to me:
1) She could simply buy the new house using her non-IRA investments, replenish these investments once she's sold her old house. Problems: The tax hit of selling appreciated assets in these accounts (this is not a major issue) and she'd nearly clean out her non-IRA funds leaving little on hand for moving expenses, etc.
2) Some kind of temporary financing secured by her IRA accounts (which are bigger than her non-IRA investments). I have no idea if these kinds of loans are common, expensive, etc.
3) Get a conventional loan on the new house with me or one of her kids (somebody with income and good credit) as a co-applicant. It would be paid off as soon as her old house sells, so it's not much of a hassle. She could put down a large down payment, so (in a rational world) the whole thing would seem to be very low risk to the bank/mortgage company.

Any thoughts on ideas I overlooked or the costs of various approaches would be appreciated.

 

[Mulligan]

Is her money in bank cd's? You can do a secured loan against the cd's Im sure. I used to do that all the time. I would buy cars this way as the rate would be better than what I could finance at yet, I never trusted myself to pay back myself. Using cd's as security usually entails a loan rate of 2-3% above the rate the CD is currently paying.

 

[samclem]

Is her money in bank cd's? You can do a secured loan against the cd's Im sure. I used to do that all the time. I would buy cars this way as the rate would be better than what I could finance at yet, I never trusted myself to pay back myself. Using cd's as security usually entails a loan rate of 2-3% above the rate the CD is currently paying.

Yes, a large share of her IRA money is in bank CDs. I can call the bank and see if they'll make a secured loan against those. Since IRAs are protected from certain types of creditor actions, I've wondered if banks might refuse to make secured loans with IRA CDs as collateral.

 

[W2R]

It's a puzzling problem. Maybe she could have most of her things moved into storage, rent an apartment while the previous house is selling (paying rent instead of payments on a loan), and then look for the new house when she has cash in hand.

But then she'd have to move twice.

 

[Mulligan]

Yes, a large share of her IRA money is in bank CDs. I can call the bank and see if they'll make a secured loan against those. Since IRAs are protected from certain types of creditor actions, I've wondered if banks might refuse to make secured loans with IRA CDs as collateral.

Its definitely worth the call, however, I never borrowed from IRA cds, just regular cds, so I don't know personally. But if they can, Im sure they would do it in a heartbeat. In their minds what better way to give out a loan, than having it backed 100% by cash!

 

[Dimsumkid]

Why not secure a conventional loan on the new house using the non-IRA assets as proof? Seems like she has the assets to buy the house outright. We did this and had to provide our brokerage statements twice, showing just enough to cover the loan amount for the loan app and again the day before closing (to prove we didn't empty them out before closing?). Never had to sell anything.

 

[samclem]

Why not secure a conventional loan on the new house using the non-IRA assets as proof?

I'm not following you. Proof of what? I'd think they'd want proof she can pay the loan back. Unless she's got income or the bank has control of the funds used as security (so she doesn't spend them), I don't see how this works.

 

[Mulligan]

It doesnt look promising on borrowing from an IRA. Here is a quick read from bankrate explaining.

http://www.bankrate.com/brm/news/DrDon/20020308a.asp

 

[samclem]

It doesnt look promising on borrowing from an IRA. Here is a quick read from bankrate explaining.

Can you borrow from your IRA?

She wouldn't really want to borrow from her IRA, but would instead want a loan in which her IRA was offered as collateral. If such a thing is possible and available at low cost.

 

[Mulligan]

She wouldn't really want to borrow from her IRA, but would instead want a loan in which her IRA was offered as collateral. If such a thing is possible and available at low cost.

Ya sorry Sam, Im brain dead tonight, as you want collateral. I googled it right this time and came up with a few. Assuming they know what they are talking about they all said the answer is no to that also, unless you can roll it into your 401k and then use it for collateral. Here was one link.

http://www.ehow.com/how_5904101_use-ira-collateral.html

 

[Dimsumkid]

I'm not following you. Proof of what? I'd think they'd want proof she can pay the loan back. Unless she's got income or the bank has control of the funds used as security (so she doesn't spend them), I don't see how this works.

You mentioned non Ira assets. She gets a statement that shows the dollar value of these assets. For me, it was my brokerage statements. I had to provide the actual statements to prove I had assets to secure the loan.

 

[Spanky]

Using IRA as collateral is considered as a prohibited transaction:
"Unlike your regular savings account, you are not allowed to use your IRA as collateral for a loan as the amount you pledge as security will be deemed a distribution by the IRS."

http://www.investopedia.com/articles/retirement/03/073003.asp#axzz1w8K9H62k
Read more: Avoiding "Prohibited Transactions" In Your IRA
​

 

[FIREd]

Using an IRA as collateral is considered to be a distribution by the IRS:

Retirement Plans FAQs regarding Loans

If the owner of an IRA pledges part of the IRA as collateral, the part of the IRA that is pledged is treated as distributed. (Code § 408(e)(4))

 

[Spanky]

1) She could simply buy the new house using her non-IRA investments, replenish these investments once she's sold her old house. Problems: The tax hit of selling appreciated assets in these accounts (this is not a major issue) and she'd nearly clean out her non-IRA funds leaving little on hand for moving expenses, etc.

How about $250000 capital-gains exemption from sales of real estate?

 

[samclem]

It's a puzzling problem. Maybe she could have most of her things moved into storage, rent an apartment while the previous house is selling (paying rent instead of payments on a loan), and then look for the new house when she has cash in hand.

But then she'd have to move twice.

Yes, that "move twice" part wouldn't be fun.

Using IRA as collateral is considered as a prohibited transaction:

Using an IRA as collateral is considered to be a distribution by the IRS:

Thanks to you both for that. I figured there would be some kind of hangup. I wonder how the IRS learns that a person has offered their IRA as collateral? Anyway, I guess that option won't work.

How about $250000 capital-gains exemption from sales of real estate?

Yes, that will allow her to avoid paying taxes on the gain from the sale of her old house, but she'd still owe CG taxes if she sold appreciated assets (e.g. stocks, etc in her non-IRA account) in order to buy a home.

 

[FIREd]

I wonder how the IRS learns that a person has offered their IRA as collateral?

I was wondering the same thing. There must be some kind of reporting requirement.

 

[Spanky]

other options:
1. stay until her house is sold.
2. borrow money, if feasible, from her kids at low interest rates.

 

[Katsmeow]

I gather she has assets but no income. She may want to look into an asset depletion mortgage. Basically they look at the size of her assets (including the IRA if she is over 59 1/2) and her life expectancy and there is a formula which determines what she could afford based upon asset depletion. She would be required to have some amount of payments in non-retirement accounts. When we heard about this I think they said 1 year but I don't recall exactly.

 

[Nords]

Why not secure a conventional loan on the new house using the non-IRA assets as proof? Seems like she has the assets to buy the house outright. We did this and had to provide our brokerage statements twice, showing just enough to cover the loan amount for the loan app and again the day before closing (to prove we didn't empty them out before closing?). Never had to sell anything.

You mentioned non Ira assets. She gets a statement that shows the dollar value of these assets. For me, it was my brokerage statements. I had to provide the actual statements to prove I had assets to secure the loan.

I'd love to know what financial institution in which state hands out mortgage loans based on assets. We've tried that several times over the last decade in Hawaii, with NFCU and PenFed and Territorial Savings Bank and BofA... and been laughed at.

We've been told that lenders don't care about liquid assets. (They don't much care for illiquid ones either.) It's all income & cash flow vs the mortgage payment.

Yes, that "move twice" part wouldn't be fun.

Will she find that preferable to the alternatives?

What about a military-style move with one big container for the household goods, temporarily stored until she finds the new home, and a smaller container for "unaccompanied baggage"? She could live for a month or two in a furnished or unfurnished efficiency, or in a residential hotel.

The advantage is that she's totally free to work on selling the old house (whatever that involves) without having to deal with moving into the new house. And when she sells the old place she's totally free to work on finding a new place without having to deal with moving out of the old house.

Of course the disadvantage is that she's living out of suitcases and will always have the wrong item in the wrong shipment.

The kid-financed mortgage sounds like the best deal. Otherwise she'd have to figure out the cap gains taxes on selling taxable investments for a down payment vs the expenses of living in a short-term rental.

Another option, way out there on the bell curve, would be to find a place to house-sit, or a friend who's willing to put her up for a couple months (with or without rent). But that latter one will quickly test the strength of a friendship...

 

[Katsmeow]

'd love to know what financial institution in which state hands out mortgage loans based on assets. We've tried that several times over the last decade in Hawaii, with NFCU and PenFed and Territorial Savings Bank and BofA... and been laughed at.

We've been told that lenders don't care about liquid assets. (They don't much care for illiquid ones either.) It's all income & cash flow vs the mortgage payment.

Look up asset depletion mortgage. It might not be applicable to you if most of your assets are in retirement funds and you are under 59 1/2. When we were considering a mortgage, our mortgage broker was very familiar with asset depletion mortgages and felt it would work. (We ended up buying a house for cash as it turned out).

 

[GusLevy]

Greetings. I am currently in the process of selling my house and planning to pursue the purchase of another house once the sale closes. For me, I wanted to sell my house before seriously considering my next house since the risk of being long two houses is not a comfortable one - I am in an apt for the near term.

One option that may work in your MIL's case may be to put contingencies on either or both sides of the transactions - i.e. sale of home to be contingent upon close of escrow on new purchase, or vice-versa. I live in an area where the housing market is extremely frothy so these contingencies would not be accepted but it may be worth a discussion b/w your MIL and her realtor for her area.

Good luck.

 

[MichaelB]

How about a bridge loan? It is designed for this transaction and secured with the house she is selling. Without income it would be hard but if she has someone to consign it might work.

 

[Spanky]

How about a bridge loan?

A bridge loan is quite expensive - the rate is about 2-3% over the general mortgage loan rate. There might be other fees as well.

 

[rescueme]

Why not secure a conventional loan on the new house using the non-IRA assets as proof?

That's not as easy as it sounds (we ran into a problem, being asset rich but income poor).

Here's a current article on the problem:

Boomers and refis: a warning - Home & Garden - MiamiHerald.com

 

[Dimsumkid]

That's not as easy as it sounds (we ran into a problem, being asset rich but income poor).

Here's a current article on the problem:

Boomers and refis: a warning - Home & Garden - MiamiHerald.com

We didn't have any problems getting this type of loan. I'm in Illinois, got it from Liberty Bank for Savings in Chicago. This is an old fashioned savings and loan. I still had to put down enough to keep the mortgage to $417k. This was a 30yr fixed mortgage.