Mortgage in early retirement

[NorthNola]

Does anyone have any experience in getting a mortgage with no apparent income? I stopped full time work in July and took a part time job in my same field. The opportunity I had been waiting for, to sell a current vacation home and purchase a slightly larger one ( same condo association) happened right after. My lender tells me that my pt income doesn’t count ( for 2 years). I have about 1.5m evenly distributed between mutual funds and an IRA. Today the lender came back and said my monthly distribution from my mutual fund account does not count. It must be a distribution from my IRA. I am not yet 59 1/2. Not until March. Sorry for the length but wanted to give my background.

Does anyone have experience with asset depletion mortgage loans? I have sold property #1 and was expecting to close this week on property #2 until the underwriters came back and said my monthly distribution must come from the other account. Can I take a penalty for a distribution or 2 throughout the loan process and go back to my regular distribution after? A 10% penalty on 5k isn’t great but I don’t want to throw my whole IRA into a penalty status. I’ve been reading this site for so long and got great advice. Finally joined. thanks so much!

 

[Bamaman]

Go find a different lender as they're not the only one operating in the mortgage market. Often banks and credit unions will fund real estate loans internally and they can operate with more common sense.

As long as someone has the resources to pay the payments, you can get the deal done.

 

[pb4uski]

No direct experience but sounds like it should work.

https://www.thebalance.com/how-to-get-a-mortgage-once-you-are-retired-2388738

For retirees with a lot of invested assets, the asset depletion method of determining income may work well. With this method, the lender starts with the current value of financial assets. Then they subtract any amount that will be used for the down payment and closing costs. They take 70% of the remainder and divide by 360 months.

For example, assume someone has $1 million in financial assets. They are going to use $50,000 for a down payment. That leaves $950,000. Take 70% of that, which is $665,000 and divide by 360. The result, $1,847, is the monthly income used to qualify the borrower.

 

[jazz4cash]

I have researched asset depletion mortgages but have no 1st hand experience. It seems the underwriting rules vary and most direct lenders don't participate so I would start calling mortgage brokers if I was interested. I'm pretty sure some lenders count non-retirement assets. I'm not clear on your statement about going back to a regular distribution, but an early withdrawal penalty is only for the amount withdrawn and will not "throw the whole IRA into a penalty status". A 72t plan might help you access the IRA funds without penalty but the amount available is limited due to the low interest rates. Again I'm not clear what the $5k refers to (monthly income?).

 

[pb4uski]

I think that s/he was thinking of doing a couple $5,000 monthly distributions from the IRA to qualify for the mortgage and paying the 10% penalty, and then once the mortgage closes, switch back to withdrawals from after-tax accounts.

I think that would work but is suboptimal to finding a lender that knows what they are doing.

 

[jazz4cash]

If the loan is that close to settlement it might even be possible to arrange the distribution as a rollover to avoid (or reduce) the penalty.

 

[NorthNola]

Thanks everyone! Yes, I was considering taking enough of a distribution from the IRA until the loan closes ( figuring 1 Month) . Yes, my distribution right now is 5k per month. And then going back to my distribution from my mutual funds. Great answers! I appreciate the help.

 

[pb4uski]

I wonder if you did a couple monthly Roth conversions for whatever income they are looking for...they look like withdrawals on your tax return in that they are pension income.. if that would meet their stupid requirement. That way you could avoid the penalty since the penalty doesn't apply to Roth conversions, but only to withdrawals.

 

[jazz4cash]

I wonder if you did a couple monthly Roth conversions for whatever income they are looking for...they look like withdrawals on your tax return in that they are pension income.. if that would meet their stupid requirement. That way you could avoid the penalty since the penalty doesn't apply to Roth conversions, but only to withdrawals.

Great suggestion.

 

[traineeinvestor]

FWIW, I took out a new mortgage on an investment property last year. Although I had only nominal employment income (small consulting fees), the bank was happy to lend against the value of the asset but only 30% LTV. I was not required to produce any proof of income.

It helped that I had a long relationship with the bank.

 

[NorthNola]

Thanks again everyone and keep those responses coming! I’ll update my progress in case it’s a help to others as well. Here are some mistakes I feel I’ve made so far (as a cautionary tale):
1. Assuming a 20 year relationship with Wells Fargo would be significant. My new mortgage is literally less than $200 more per month than my current mortgage. I thought a track record and relationship would somehow help me. Not really. I’m like a new borrower.
2. Referring to myself as “retired”. As a former benefits professional I should know better. At 59 I do not officially meet that government sanctioned standard. Early retiree does not mean retired and I should not have used that term frivolously when describing my situation to my lender. Being very specific about the terms “retirement account” , IRA and “assets” is important as well.
3. Stopping full time work in the ( somewhat) middle of this process without finding out the consequences was key. Finding out that my part time job in my 30 year career field does not count as income ( for 2 years) shouldn’t have been a shock. I should’ve better informed myself.

All those mistakes aside, this is still an important purchase to pursue. I was able to sell my condo at a very good price ( that will net me 120k to put down on the new one). Going from a studio one bath to a 3 bedroom 2 bath ( for sale by owner at a very low price) in an area that is growing in property value. I’ve been researching property for 2 years and believe condo #1 would top out in value while #2 has the strong potential to increase. Also condo #2better suits my retirement plans : to have a place where friends and family can gather together and enjoy. Can’t envision that future in a studio w 1 bathroom!! Thanks again for all your suggestions and information.

 

[joeea]

If you are working with a good financial adviser, they can help. They can prepare the documents showing that you can afford the mortgage, and how you will do so.

 

[karen1972]

I have an asset based mortgage closing in December. I had very few choices in companies that would work with me and Im paying 5.65% on a 30 year loan. The private lenders will give you the money but at a price. Since this is a temporary cash flow problem/tax problem for me its worth it.

70-80% of all lenders will use Freddie/Fannie rules, that means they will take your Tax deferred assets and calculate based on if you were taking RMDs and your taxable assets they took dividends that had been issued for a substantially consistent time (usually 1-2 years).

So Asset Depletion puts you at $1847 on a million invested, with a 28% loan to debt ratio gives you a loan payment of $517 a month (including P&I, tax, insurance).

Freddie was worse, that came to only $18K of income (based on my age/RMD) so only qualified for $420/month

Of course, neither of these numbers make any sense on a million dollars, I mean you could put your money in a CD these days and make more than 2% ($20K) they are using. .. thus the need for private lending. They have their own underwriters and use their own rules.

Mine required 25% down payment, took $500K off the top and then calculated only 60 months of payments on what was left. To them, that eliminated the risk. Hopefully, you find something better as I know financially this makes sense for me for lots of reasons but I don't like paying that high of an interest rate. I just keep telling myself, an extra 1% to the lender or an extra 15% in taxes to the government... yeh I'll take the 1% for now.

 

[Bigdawg]

OP, would the seller of the bigger condo#2 for sale by owner be willing to carry the note? I have been carrying a buyer of my townhouse now for 1.5 years on a contract for deed. No issues.

 

[kimcdougc]

We are currently looking for a home. Waiting for that good deal. We were having the same problem getting a loan. I went to my local credit union and they approved us after jumping through hoops. We had to get a letter from FIDO stating what we had in the account and that we were able to get as much as we wanted whenever we wanted with a phone call or a flick of the mouse.

It went to underwriting twice but then they finally approved it. DH has a small pension monthly. They would not (as you say) accept our money we receive from our small work at home jobs for two years.

Good luck working this out.

It's crazy when you have the assets to pay for a house in cash 4 times over and a credit score of 825. They still think you are a risk when you haven't ever been late on anything. Funny how business works.

 

[karen1972]

To note, if you know any real estate agents, they will likely know some private lenders to point you too, you don't have to hire them, but almost all fo them want to get any potential person pre-qualified.

And btw, good luck. I wish I had known the same things as I would be locked into a 2.89% 30 yr mortgage right now.. grrr. But we are moving for same reasons, we have topped out in current townhome, new townhome is much more likely to add value long term, provides the lifestyle we really want long-term, new construction means less ongoing maintenance and is way more energy efficient .. and if I could close by year end I got $20K off the purchase of the house (hard to pass that up) as they need the cash inflow to start the new phase. (btw, their builder mortgage company turned me down even though they are highly incentivized to say yes to everyone).

 

[daylatedollarshort]

We found when we were considering buying an investment property that credit unions were willing to look at our portfolio income but not banks. We didn't end up buying a second property but we did have a pre-approved letter so I think that means they cleared the loan with their underwriting group.

 

[NorthNola]

Update and Thanks

thanks again to everyone for your insight and advice. I decided to set up a distribution from my IRA after convincing my FA that he wasn't making a serious fiduciary mistake. He's great and very knowledgeable but even admitted this was something he didn't know enough about. I showed him your responses when we met, so rest assured your wisdom will carry through to others as both he and I get schooled on how hard this is.

It didn't make sense to start the process over as I had a locked in rate of 4.75. I started talking to banks and credit unions but was looking at a higher rate. And I was afraid of too many new loan inquiries affecting my credit score. Even with simple online inquires I would get stopped at asset dissipation for a second home. Plus as many of you said I would only qualify for a tiny mortgage and a high rate.

My lender was doing everything he could to get me the rate and the size mortgage I wanted. My FA was definitely looking out for my best interest but when I showed him just how small of a box I was in he agreed that a $500-600 penalty was a small price to pay. Since all I need is for the lender to see a distribution from the IRA at the time of close we can stop it and go back to my normal distribution from my savings.

A lot of ridiculous hoops to go through and a couple of sleepless nights but it looks good at this moment.

Thanks again and happy thanksgiving!

 

[pb4uski]

So they would not consider a Roth conversion a distribution for the purpose of getting the loan? A conversion would avoid the penalty but a withdrawal would not.

You only need to do one distribution and all is a-ok?

 

[GalaxyBoy]

Even if the lender wanted to see periodic withdrawals from the IRA it seems that once the loan closed, one could simply stop them?

 

[NorthNola]

So they would not consider a Roth conversion a distribution for the purpose of getting the loan? A conversion would avoid the penalty but a withdrawal would not.

You only need to do one distribution and all is a-ok?

I think with the Roth conversion , I can't use the funds for 5 years but Im not sure.

Yes, according to my lender that is all we need to show to close the loan, after that it doesn't matter where the funds come from as long as I keep paying. Its like getting verification from an employer- you could need be employed at the close but laid off the next day.

 

[pb4uski]

I guess my point was that if they will count a Roth conversion that it doesn't matter how soon you can use the money... you avoid the penalty and then just use it in 5 years... it'll still be invested for that 5 years and avoiding the penalty gives you a 10% head start and 2%/yr guaranteed return plus any growth.

OTOH, if in order to count the money it needs to hit one of your taxable accounts then the Roth conversion doesn't work and the penalty is just part of the cost of getting the mortgage.

 

[golfnut]

I'm retired and wife works pt (small salary). I know it's not necessarily the same as a mortgage but we were successful getting a home equity line for $100,000 from PNC.



It was relatively painless. Give them a shot - I think there a few of them in Pittsburgh.