Downsizing: carry a new mortgage or buy outright?

[BBQ-Nut]

So as I consider possible future FIRE scenarios, one of them is downsizing from our current home where we have almost paid off the loan and have a sizable chunk of equity to realize.

If both the DW and I are FIRE'd and have no 'earned income' - is it possible to qualify for a mortgage for a downsized home, or would we have to use the first home sale proceeds to buy the downsized home outright?

 

[Senator]

You will probably have to pay cash...

 

[photoguy]

There's a few threads on this

http://www.early-retirement.org/forums/f28/obtaining-a-first-mortgage-as-a-retiree-62341.html

http://www.early-retirement.org/forums/f28/can-you-get-a-mortgage-loan-when-retired-37374.html

http://www.early-retirement.org/forums/f28/obtaining-a-mortgage-post-retirement-33875.html

http://www.early-retirement.org/forums/f28/refinance-with-1099-income-62020.html

http://www.early-retirement.org/forums/f28/refinance-mortgage-after-hasty-retirement-60834.html


Personally we've setup our finances so that we can pay cash if necessary but I think I would prefer a mortgage if we could obtain it.

 

[RetireBy90]

A buddy of mine had a similar situation, retired with a lump sum, couldn't get a mortgage cause he didn't have any income. He purchased a couple houses to rent, now has an income stream and was able to get the loan.




I would suggest it may be difficult to get a mortgage if you don't have an income stream from somewhere besides draw from the retirement accounts.

 

[pb4uski]

It depends. I was surprised to find out that if you are doing Roth conversions that they will count that as "pension' income even though it isn't a pension because it is reported as pension income on your tax return even though the Roth conversions are totally discretionary and would end once the tIRA they are coming from is exhausted.

Call your local bank credit union or mortgage broker and they can tell you in a short conversation.

 

[JOHNNIE36]

So as I consider possible future FIRE scenarios, one of them is downsizing from our current home where we have almost paid off the loan and have a sizable chunk of equity to realize.

If both the DW and I are FIRE'd and have no 'earned income' - is it possible to qualify for a mortgage for a downsized home, or would we have to use the first home sale proceeds to buy the downsized home outright?

Early this year we bought a new home ($200+) and had to get a mortgage. We had another house that had not sold so we were in a bind. Had the money in IRA's and other investments and didn't want to cash these in. Both of us have Social Security and I get a nice pension, but no earned income. We got the mortgage because we had the ability to make the payments

 

[harley]

It depends. I was surprised to find out that if you are doing Roth conversions that they will count that as "pension' income even though it isn't a pension because it is reported as pension income on your tax return even though the Roth conversions are totally discretionary and would end once the tIRA they are coming from is exhausted.

Call your local bank credit union or mortgage broker and they can tell you in a short conversation.

I tried unsuccessfully for years to refinance as a retiree. Minimal (< $20K) income, but I was doing Roth conversions up to the top of the 15% bracket. Nobody would consider that as income for the purposes of refinancing. Finally when my mortgage holder (MetLife) folded and Chase ended up with our mortgage, they needed to refinance some percentage of the acquired mortgages for some reason, and we were finally allowed. So I think the Roth "income" is something they can use to fudge the numbers if they so choose.

Interesting side note, the mortgage guy who contacted and worked with us during the refi was the son of Mark Belanger, the old Baltimore Orioles shortstop.

 

[poorcarver]

The retiree mortgage thing is pretty interesting and apparently widely variable. I retired in February and the local mortgage guy at our Chase branch looked over our stuff and offered qualification based on retirement account balance which in his mind translated to ability to pay.

 

[pb4uski]

I tried unsuccessfully for years to refinance as a retiree. Minimal (< $20K) income, but I was doing Roth conversions up to the top of the 15% bracket. Nobody would consider that as income for the purposes of refinancing. Finally when my mortgage holder (MetLife) folded and Chase ended up with our mortgage, they needed to refinance some percentage of the acquired mortgages for some reason, and we were finally allowed. So I think the Roth "income" is something they can use to fudge the numbers if they so choose. ....

Interesting. To be clear, I haven't refinanced based on Roth "income" but have seen posts to that effect elsewhere on these boards and confirmed it with a credit union mortgage loan officer. I think if I were refinancing I would characterize it as pension income and not disclose that is it a discretionary Roth conversion unless I was asked.

 

[Accidental Retiree]

We worked with a mortgage broker who told us that monthly withdrawals from an IRA (our 72(t) withdrawals) would count as income, so long as we could show the payments would continue for at least 2 years. He also said SS payments would constitute an income stream.

All agreed that having a big chunk of money would not help get a loan; lenders wanted to see an ongoing taxable income stream. Monthly withdrawals were good; one-time lump sums were not useful.

 

[Totoro]

It sometimes can get even more silly. Guy I know had the following situation.

Home value: About 2M usd. Wanted to finance 90% I believe.

Net income after tax, before mortgage deduction:

• Fixed: +/- 450k.
• Variable: Typically from 100k up to 1M, average 300k (partner in a very successfull consulting business).

Net assets: > 1M (possibly >2M, not sure). And equity ownership in the consulting business.



Result: Had alot of trouble getting a loan.


Bank only looks at proven stable income, not at earning potential nor assets.


Unless you are an ultra-high net worth individual or have a company, then other options open up.