Getting a new mortgage when retired.

[rayvt]

My experience has been the banks want to see a cash flow, ie 1040. They don't seem to care how much you have in the bank or how much you can get your hands on in a few days/weeks.

They want to see something that behaves like a paycheck. Regular withdrawal cash flow that comes every month. Everybody knows how paychecks work, but nobody can get their head around the answer of "What is your monthly income?" as "Whatever I feel like withdrawing."

 

[cpaBJB]

We demolished our lakefront seasonal "camp" in Oct 2011 and rebuilt a year-round home and moved in May 2012.

It wasn't until after all was said and done that it dawned on me that perhaps I should have let our mortgage lender know that we had demolished part of their collateral.

They had no way of knowing.

We bought a new house in March and are currently selling our Florida condo (which has no mortgage). For the new house, rather than sell my brokrage account investments, I took out a Pledged Asses Line of Credit to pay for the new house and then will pay that off when the Florida condo sells. The interest rate is 8.72%, but I am earning over 5% on the collateral so my net cost is only about 3.75% so if you have a good sized brokerage account then you might consider that as temporary substitute collateral for the lender.

If it was me, I would not tell then lender and plead ignorance if you get caught. If the mortgage balance is less than the land value, I wouldn't sweat it.

I have thought about doing something like this. But if you're paying taxes on the 5% earnings and not able to deduct the 8.72%, I think the net cost is worse than the simple subtraction of rates.

 

[meleana]

If you knock the house down how can you get a mortgage? Wouldn’t that require a construction loan?

 

[meleana]

Not at all unusual in my area. When they built my gated community 5 years ago there were protests that the land could've been put to better use by building 500 "tiny houses" instead of the 75 that we have.

"Density" is now often viewed as a positive thing depending upon where you live.

Happening everywhere. NH starting to push this and there’s even a bill in the state house to try to take away local municipality control. Big debate and push back going on.

 

[NXR7]

... I took out a Pledged Asses Line of Credit to pay for the new house ...

Yep, that's kind of my plan as well.

 

[cranberryjoe]

Like others, I got my mortgage in retirement by establishing a scheduled monthly withdrawal from my IRA, providing proof of that monthly withdrawal in the form of a letter that I downloaded from Fidelity (didn't even have to talk to anyone at Fidelity). I canceled the scheduled withdrawals the day after closing. While setting up the loan, the loan officer told me the amount that monthly withdrawal needed to be in order to qualify for the loan. He was totally in on the game and told me exactly what I needed to do.

 

[doneat54]

Not at all unusual in my area. When they built my gated community 5 years ago there were protests that the land could've been put to better use by building 500 "tiny houses" instead of the 75 that we have.

"Density" is now often viewed as a positive thing depending upon where you live.

Ahhh. You lost me at "Gated Community". Not for me.

 

[doneat54]

Well I talked to the bank. They said for my situation a "Construction Loan" could be submitted against house plans. The amount of the loan must also pay off the existing mortgage. But as others have said, they want to see some kind of regular withdrawals from the portfolio, and a balance behind them to support years of such withdrawals (not a problem). As other have said, once the loan is processed and paid, I can apparently just cancel the withdrawals, which I would. I do what another poster called "lumpy" withdrawals several times a year. I like it that way.

In this process we are embarking with investing in the development some house plans, knowing it is a sunk cost whether we actually do this or not. Detailed plans are required for the town to approve the project (including new septic design). We are going to work on this until the fall when we think it will be a "fish or cut bait" moment. A bit relieved/surprised that a modest mortgage might be possible for us.

 

[skyking1]

Very good news for you. It sounds far less complicated than some other scenarios.

 

[marko]

Ahhh. You lost me at "Gated Community". Not for me.

The whole point behind a gated community is that it's not for everyone.

 

[doneat54]

Back on this, with a tangential question.

But first we found that most banks will not give a construction loan as a "bank statement" loan. In our case we will (apparently) need to show a steady income stream. Thought is to have DW start collecting SS next year instead of 6 years from now (as on our original plan), and set up a recurring monthly distribution from Fidelity into our home bank. But right now we are just "talking" mortgages with banks because.......

... we still don't have a quote from the builder so we don't know if we can even afford to do this. We have bought house plans, and engaged a builder who is very interested, highly regarded and has been good with regular communication. He has brought 2 different site engineers out here already. But we have no idea where the quote might land. He says he is 1-2 weeks away from getting us some numbers.

So, I have been running all kinds of scenarios through my mind. And only recently did I think to raid our Roths for some tax free money that would put us in a better position with the (post tax) cash we already have on hand plus have a modest mortgage that DW's SS could easily cover. Which brings me my question:

The combined values of our Roths represents about 5% of the overall portfolio. The attraction is tax free cash. Without even doing this, we will probably already be well into the 24% tax bracket with income from the portfolio for 2025. I realize that if left alone, the Roths should/could grow and years from now be an even bigger source tax free money. But it seems that if we do this house build, it would probably be the one time in our remaining years that we needed a good infusion of $$ without a big tax hit. The alternative would be to leave it and take a bigger mortgage. My Roth has done just shy of 9% YTD and 15+% over the last year. I'd expect mortgage rates when/should we need one to be in the 5-6% range (that's a guess)

I have no doubt that the portfolio could take this 5% hit and we'd still be just fine for the overall retirement/funding plan. Just not sure if this is the right/best thing to do at this time.

Thoughts?

 

[rayvt]

We went through this exact same thing.
Mortgage lenders want to see a monthly income that looks like a paycheck. Set up an automatic monthly withdrawal from your IRA or Roth with your broker. When we did it they just wanted to see the instruction letter you gave your broker.

This is basically a FNMA requirement. If you like, you can get ahold of the FNMA rules and see what the criteria is. When we did it, they wanted to see a monthly "income" that meets the 28%/36% guideline. Also that the account has enough money to support that withdrawal for 3 years.

After the loan closes, you can cancel the monthly withdrawal.

We got a combined "one close" construction/permanent loan. I don't know if anybody does that anymore. Ours was from Wachovia, but they went out of business in 2008.

One time they just wanted to see our instruction letter to the broker. Another time they wanted to see at least one monthly withdrawal hit our checking account.
One time they just wanted to see the check from our broker. We faxed them a copy of the check but didn't deposit it. After the loan closed we called the broker and told them to cancel the check and reverse the withdrawal.

We told that that our income was whatever we wanted it to be each month, we just withdrew what we needed each month. They said that's not good enough, we need to see that you get a constant monthly withdrawal.

 

[Koolau]

We needed a mortgage to bridge between two properties. FINALLY the bank accepted the fact that our 1040 showed "income" when we converted tIRA's to Roths for several years. Makes no sense but that's what happened and YMMV.

 

[Looking4Ward]

We went through this exact same thing.
Mortgage lenders want to see a monthly income that looks like a paycheck. Set up an automatic monthly withdrawal from your IRA or Roth with your broker. When we did it they just wanted to see the instruction letter you gave your broker.

This is basically a FNMA requirement. If you like, you can get ahold of the FNMA rules and see what the criteria is. When we did it, they wanted to see a monthly "income" that meets the 28%/36% guideline. Also that the account has enough money to support that withdrawal for 3 years.

After the loan closes, you can cancel the monthly withdrawal.

We got a combined "one close" construction/permanent loan. I don't know if anybody does that anymore. Ours was from Wachovia, but they went out of business in 2008.

One time they just wanted to see our instruction letter to the broker. Another time they wanted to see at least one monthly withdrawal hit our checking account.
One time they just wanted to see the check from our broker. We faxed them a copy of the check but didn't deposit it. After the loan closed we called the broker and told them to cancel the check and reverse the withdrawal.

We told that that our income was whatever we wanted it to be each month, we just withdrew what we needed each month. They said that's not good enough, we need to see that you get a constant monthly withdrawal.

This is exactly what I did. With no W2 income, lender wanted to see regular scheduled withdrawals from my IRA (after tax brokerage account didn't qualify as income). They told me how much it needed to be in order to qualify for the best rate. I setup the scheduled monthly distribution on the Vanguard site, printed the form that indicated I had done so, provided that and a copy of my checking account statement showing the direct deposit.

They approved the mortgage and I cancelled the automatic withdrawals the day of closing.

 

[jazz4cash]

One time they just wanted to see the check from our broker. We faxed them a copy of the check but didn't deposit it. After the loan closed we called the broker and told them to cancel the check and reverse the withdrawal.

LOL

 

[rayvt]

The funny thing was, when I first said I'd withdraw from a non-IRA taxable account, they they would not accept that because "You could cancel the withdrawals." It had to be an IRA retirement account.

I said "But I could cancel the withdrawals from the IRA!" She said, "Yes I know you could. But that's the way our guidelines are. It has to come from a retirement account."

 

[jazz4cash]

The funny thing was, when I first said I'd withdraw from a non-IRA taxable account, they they would not accept that because "You could cancel the withdrawals." It had to be an IRA retirement account.

I said "But I could cancel the withdrawals from the IRA!" She said, "Yes I know you could. But that's the way our guidelines are. It has to come from a retirement account."

So funny because I’m always asking this rule or that one exists and people I know frown and say ‘the bank knows best’ or some nonsense when many of these rules are just random.

 

[RetiredHappy]

When our FA suggested that we take a small mortgage when we bought our current home, their loan officer asked us the most intrusive questions that we simply wanted to abandon the process. Then when the documents were sent to us to sign, it showed that I had no income (basically a loafer in the relationship) when I brought more than half the assets to the marriage, and lots of dividends from the taxable account. She filled everything out that it belonged to my husband. It was so infuriating and insulting that my husband picked up the phone and threatened my FA that they better fix it or we would simply transfer all our investments out of their firm. It was definitely micro inequalities.

 

[zangbao]

This is exactly what I did. With no W2 income, lender wanted to see regular scheduled withdrawals from my IRA (after tax brokerage account didn't qualify as income). They told me how much it needed to be in order to qualify for the best rate. I setup the scheduled monthly distribution on the Vanguard site, printed the form that indicated I had done so, provided that and a copy of my checking account statement showing the direct deposit.

They approved the mortgage and I cancelled the automatic withdrawals the day of closing.

How long did you have the scheduled monthly distribution in place for before your mortgage was approved?

I may be getting a mortgage in a couple of years and will have to deal with this issue.

 

[rayvt]

How long did you have the scheduled monthly distribution in place for before your mortgage was approved?

I may be getting a mortgage in a couple of years and will have to deal with this issue.

It varies. None, 1 month or 2 months. It depends on the underwriter (the one who reviews the application documents that the loan processor passes on t them--and who you cannot talk directly to.)
In my case, they just wanted to see either a check from my IRA broker or a deposit hitting my checking account. I have never had to show 2 months.

It's all in the FNMA guidelines, which get updated periodically. It is easier now for retirees, since so many baby boomers are now retired and getting mortgages. The first time for me was in 2005 and Amerisave had never done one.

B3-3.1-09, Other Sources of Income (05/01/2024)

This topic provides information on documenting and qualifying a borrower’s income from sources other than wages and salaries, including:

selling-guide.fanniemae.com

"Verification of Retirement, Government Annuity, and Pension Income
Document current receipt of the income, as verified by one or more of the following:
a statement from the organization providing the income,
a copy of retirement award letter or benefit statement,
a copy of financial or bank account statement,
a copy of signed federal income tax return,
an IRS W-2 form, or
an IRS 1099 form."

"If retirement income is paid in the form of a distribution from a 401(k), IRA, or Keogh retirement account, determine whether the income is expected to continue for at least three years after the date of the mortgage application. Eligible retirement account balances (from a 401(k), IRA, or Keogh) may be combined for the purpose of determining whether the three-year continuance requirement is met."

Note that it says "retirement account". That's why they don't accept a regular taxable brokerage account.
Also note that it is silent on how long you have to have been receiving the monthly distribution. Just "verified current receipt".

 

[zangbao]

It varies. None, 1 month or 2 months. It depends on the underwriter (the one who reviews the application documents that the loan processor passes on t them--and who you cannot talk directly to.)
In my case, they just wanted to see either a check from my IRA broker or a deposit hitting my checking account. I have never had to show 2 months.

It's all in the FNMA guidelines, which get updated periodically. It is easier now for retirees, since so many baby boomers are now retired and getting mortgages. The first time for me was in 2005 and Amerisave had never done one.

B3-3.1-09, Other Sources of Income (05/01/2024)

This topic provides information on documenting and qualifying a borrower’s income from sources other than wages and salaries, including:

selling-guide.fanniemae.com

"Verification of Retirement, Government Annuity, and Pension Income
Document current receipt of the income, as verified by one or more of the following:
a statement from the organization providing the income,
a copy of retirement award letter or benefit statement,
a copy of financial or bank account statement,
a copy of signed federal income tax return,
an IRS W-2 form, or
an IRS 1099 form."

"If retirement income is paid in the form of a distribution from a 401(k), IRA, or Keogh retirement account, determine whether the income is expected to continue for at least three years after the date of the mortgage application. Eligible retirement account balances (from a 401(k), IRA, or Keogh) may be combined for the purpose of determining whether the three-year continuance requirement is met."

Note that it says "retirement account". That's why they don't accept a regular taxable brokerage account.
Also note that it is silent on how long you have to have been receiving the monthly distribution. Just "verified current receipt".

This is helpful. Thanks!

 

[pb4uski]

This is exactly what I did. With no W2 income, lender wanted to see regular scheduled withdrawals from my IRA (after tax brokerage account didn't qualify as income). They told me how much it needed to be in order to qualify for the best rate. I setup the scheduled monthly distribution on the Vanguard site, printed the form that indicated I had done so, provided that and a copy of my checking account statement showing the direct deposit.

They approved the mortgage and I cancelled the automatic withdrawals the day of closing.

That's the way to go. But when you sit back and think about it, it is a bit stupid... all form and no substance.

 

[rayvt]

That's the way to go. But when you sit back and think about it, it is a bit stupid... all form and no substance.

The mortgage industry got badly burned back 2008, with NINJA loans and nodoc liar loans.
There is some substance for these requirements.

They know that you could stop the withdrawals, but since they see you have at least 3 years of payments in a retirement account they have some assurance that you'd be able to make the payments. That's better assurance than the typical non-retired home buyer living paycheck-to-paycheck with a job that he could lose any time and no more than 2 months worth of payments in the bank.

 

[jazz4cash]

They burned themselves with NINJA and nodoc liar loans and now responsible borrowers have to jump through more hoops to get approved.

 

[pb4uski]

I understand all of that, but why would they think that a retiree with a large retirement account that is multiples of the mortgage, has a good FICO score and a history of paying their bills on time and puts 20% down is likely to default on their mortgage and lose thier home at all? in a pinch they'll raid their retirement savings over losing their home and their 20% down.

That seems a lot less likely of a default than a younger borrower who puts 20% down, pays their bills but has little savings but a job that can end at any given moment.

If the younger borrower gets in financial trouble then they have little choice but to default if their cash flow dries up unless they have other savings where the first borrower has a verifiable source of funds that they could use to make their mortgage payments if ever needed.

It just seems very backwards to me.