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How to apply for a mortgage with very little income, but substantial down payment?
Old 05-06-2015, 10:35 PM   #1
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How to apply for a mortgage with very little income, but substantial down payment?

Last winter, I started to feel that I needed to eventually move out from Midwest due to 5-month long winter. Then, I felt that my savings might be close enough to retire. I started to run different calculations and came to the conclusion that I needed to work 4 more years until I reach 55, so that I can withdraw money from my 401K plan.

I found lots of interesting discussions on this website. So, today, I am posting my questions.

Before I can ER, I need to overcome some obstacles.

1. Medical coverage: it is my understanding that if my taxable income is below $60k (Married Filing Jointly), we may qualify to get substantial discounted Obamacare premium (more than 50% off?). This should not be too hard to accomplish. If I only withdraw $30k from 401k annually and I can withdraw the rest from my Roth 401k (or Roth IRA). Is this correct?

2. One of my objectives is to move to somewhere warmer. Here is a bigger problem. I need to sell my current house, which still has $400k mortgage (with no plan to pay it off soon) and buy another property in a new town, with a similar mortgage (or may be a little less, say $200k-$300k). The reason I am keeping the mortgage is I have some other asset that I don’t want to sell and I don’t want to withdraw a big chunk of my 401k to trigger immediate income tax. Can someone tell me where I can apply for a mortgage, considering that I will have very low taxable income (or even no income for the first year), but I can pay over 50% down payment for the new house?
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Old 05-07-2015, 08:23 AM   #2
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I also live in the Midwest.

In March, I bought a second home in sunny Florida.

I early-retired 8 years ago and receive a mini-pension from my former employer. I have substantial savings in tax-advantaged accounts, but I did not want to incur a huge tax hit by withdrawing a large amount from my IRAs, so I decided to pursue a mortgage.

I was able to secure a mortgage at 2.89% fixed rate for 10 years, putting 30% down, through Third Federal Savings and Loan. https://www.thirdfederal.com/home

Initially, their loan officer sounded a bit skeptical. After reviewing my situation in detail, their underwriting department had no problem approving a mortgage.

The attorney who handled the title work said they were one of the largest mortgage lenders nationally. He also commented favorably on the great rate I got, plus the low fees charged for the loan.

omni
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Old 05-07-2015, 08:29 AM   #3
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Using a "main stream" lender will most likely not work in your favor. You will need to seek out a bank that will do manual underwriting. With the 50% down, would the mortgage still be in the 300K range? If so, I don't think you find very many (if ANY) lenders that will underwrite that with such low income. This is not to say it can't be done, but it will probably be quite difficult and the terms will probably not be favorable.
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Old 05-07-2015, 09:22 AM   #4
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We've been pre-approved for $100K more than I want to borrow, with total of his SS and my pension at $34K/year. I think it helped that we have enough assets to pay cash for 10+ houses in the range we want to buy. The investment income on our 2014 tax return was healthy, too. That fluctuates, but I think it helped.


In our case, we went with a mortgage broker in our church; he's with BNC Bank.
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Old 05-07-2015, 09:42 AM   #5
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Since you state you are going to work for another 4 years - I would suggest that a year before you retire, you go to your bank and get pre-qualified to buy another home. If your income at that time won't qualify for a second home purchase, you may have to list your present home in order to qualify to buy the new home. If the existing home sells quickly, you might have to temporarily rent until you retire and then make the final move to wherever you bought the new home.
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Old 05-07-2015, 07:23 PM   #6
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Quote:
Originally Posted by omni550 View Post
I also live in the Midwest.
I early-retired 8 years ago and receive a mini-pension from my former employer. I have substantial savings in tax-advantaged accounts, but I did not want to incur a huge tax hit by withdrawing a large amount from my IRAs, so I decided to pursue a mortgage.

I was able to secure a mortgage at 2.89% fixed rate for 10 years, putting 30% down, through Third Federal Savings and Loan. https://www.thirdfederal.com/home

omni
Thanks for sharing. At the time when you applied for the mortgage, did you have any pension or take SS?

I will contact Third Federal Savings.
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Old 05-07-2015, 07:44 PM   #7
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You should check with your plan, but I would think you could withdraw from both 401k and Roth 401k as you plan to.

My understanding is that many mortgage lenders would consider 401k withdrawals to be income since it shows up as pension income on your tax return. It's sort of silly because it is totally discretionary but that is the way they do it. As I understand it they essentially look at sources that comprise total income on your tax return.

I initially was planning to try to keep our income below 400% FPL to take advantage of Obamacare subsidies. I ultimately concluded that was not a good course for us because we would end up in the 25% tax bracket once SS and our pension and RMDs start. We are much better off to forego Obamacare subsidies and do Roth conversions to the top of the 15% tax bracket between now and when SS, pension an RMDs start. The difference in taxes was much higher than the Obamacare subsidies.

Since the lowest cost bronze plan available to us exceeds 8% of our Obamacare MAGI we can buy lower cost catastrophic coverage that in our state is about 37% less than a bronze plan and the benefits are only a little different but I understand that in some states the price difference minimal so YMMV.

Have you checked into the cost of health insurance in the area you want to move to? If not, healthsherpa.com is a good place to start.
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Old 05-07-2015, 08:13 PM   #8
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On O'care: Opinions differ on this, but I take the view that the subsidies will eventually be means tested in some fashion (looking at wealth) or go away entirely. As such, I intend to get while the getting is good. If you are looking to maximize subsidies and can engineer your income to be whatever you like, the sweet spot is approximately 135% of whatever the federal poverty line is for your size household.


As for the mortgage, the simplest way is to apply for a second home mortgage while you are still employed. Otherwise, you will need to find a lender that makes loans that are not restricted to the idiotic gubmint agency rules. Local banks, credit unions and even brokerages or private banking/high net worth shops would probably be the places to shop. If you have a large taxable account, one possibility is a "pledged asset loan."
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Old 05-07-2015, 11:10 PM   #9
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Originally Posted by itsme2 View Post
Thanks for sharing. At the time when you applied for the mortgage, did you have any pension or take SS?

I will contact Third Federal Savings.
Itsme,

I was only collecting my mini-pension. I mentioned that I would be getting SS in the future. They responded saying they only count what you have coming in at the moment.

omni
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