Getting Credit once ER'd?

[Surfdaddy]

To start out, I've *temporarily*(?) lost my j*b and almost have enough to ER.

The big gotchas would be to reduce spending slightly, and hope for the market to continue upward. We currently spend about 4% of our current savings/year, but I'd rather be at 3%. So this requires either a 33% appreciation in our funds, or a cut in living costs. The wildcard is healthcare, since we are only in our early-mid 50's.

But I'm finding I LOVE the lack of w*rk and stress!

So question - I don't really need to refi my small mortgage, but it did occur to me that - could I? I mean I won't be able to report a job or formal earnings! I could easily write a check and pay it off if I wanted to, though.

Similarly, if we see a better credit card deal (rebate card or something like that) and we want to switch to a different card, how do we do that without a job or earnings to report? We have plenty of money and credit scores in the low 800's.

 

[chinaco]

There was another post on the same topic a little while ago. You might do some searches on the forum to see if you can find it.

IMO - I would pay off the mortgage. Especially with return on fixed investments. You are unlikely to match the return of getting rid of the mortgage with the same money without taking more risk.

 

[Nords]

So question - I don't really need to refi my small mortgage, but it did occur to me that - could I? I mean I won't be able to report a job or formal earnings! I could easily write a check and pay it off if I wanted to, though.
Similarly, if we see a better credit card deal (rebate card or something like that) and we want to switch to a different card, how do we do that without a job or earnings to report? We have plenty of money and credit scores in the low 800's.

I'm not sure how the mortgage banks apply their FHA & Fannie Mae criteria, but each one seems to have their own interpretation of your ability to pay off the mortgage.

800+ credit scores mainly get you a better interest rate. I can't tell that they have any impact on ability to make the payments on time.

The main focus on the application approval is your dividend & interest income (as well as any employment income and pensions). Assets don't seem to count for anything unless they're producing income. Sure, sure, you could pay it off in 10 minutes, but they view assets as ephemeral. Rental income is viewed with skepticism unless you have two years of deposit records to back up your claims. Otherwise they apply pretty harsh estimates to vacancies and repairs/maintenance.

This attitude may be worse if you have other debt. Every time we refinance we're told that they have to have our credit-card statements to know which debts we're paying off. Every time they tell us we forgot to fill out the big blank space on the last page where you're supposed to list your debts. Every time when we state that we have no debts, they get this look on their face as if they're going to have to check with their supervisors...

A couple years ago, when we did a refi during the credit freeze, I had to prove to a civilian (who was not a veteran) that the Navy really did intend to pay me a pension next year. Because after all I'd only been collecting one for six years, and who knew what might happen next year.

 

[chinaco]

I guess one lesson here is to get the loans and credit cards positioned the way you want it before you FIRE...

 

[Surfdaddy]

So I guess if I want to change Credit Cards (we don't carry balances), I either do it this year (still had substantial income), restructure investments for more income next year, or .....lie?

 

[CTRetiree]

Let me start by saying my wife & I have never paid a credit card interest charge.

My wife & I had one credit card with a limit far more than we need. That one unfortunately had a $300 limit on the annual cash back one could earn. I applied in my name only with just my retirement pension stated as income and was surprised to receive only a $1000 credit limit. I requested an increase, but was told that I would have to wait 6 months. For a guy with stellar credit, this was kind of shocking. My solution is to prepay the credit card so that I can charge more on it. I want to get all the 2% cash back from it I can, so the earnings I am losing on advancing them the money is more than made up by the 2% return on the purchases.

 

[zinger1457]

I paid off my mortgage before I ER'd and would suggest you do the same if possible. I have not had any problems getting credit cards after I ER'd, got two mainly for the airline miles.

 

[grasshopper]

4 years into ER no debt, no mortgage, and lots of ST-MT bonds not paying a lot. I bought a new truck, the salesperson said he never saw a credit score as high as mine. Decided that having a credit history after ER and a nice GM interest rate I opted for a loan.

I went on line and secured on from Cap One for a back up plan if needed. Through the dealership I was plugged into the finance program. BofA tilt even thought my last car loan was with them. Cap one tilt again. Three rejects total, explanation not enough income.

Lucky for me I had a back up or cash if needed. Next time I will include my retirement fund income and distributions.

 

[BLS53]

I'm not sure how the mortgage banks apply their FHA & Fannie Mae criteria, but each one seems to have their own interpretation of your ability to pay off the mortgage.

800+ credit scores mainly get you a better interest rate. I can't tell that they have any impact on ability to make the payments on time.

The main focus on the application approval is your dividend & interest income (as well as any employment income and pensions). Assets don't seem to count for anything unless they're producing income. Sure, sure, you could pay it off in 10 minutes, but they view assets as ephemeral. Rental income is viewed with skepticism unless you have two years of deposit records to back up your claims. Otherwise they apply pretty harsh estimates to vacancies and repairs/maintenance.

This attitude may be worse if you have other debt. Every time we refinance we're told that they have to have our credit-card statements to know which debts we're paying off. Every time they tell us we forgot to fill out the big blank space on the last page where you're supposed to list your debts. Every time when we state that we have no debts, they get this look on their face as if they're going to have to check with their supervisors...

A couple years ago, when we did a refi during the credit freeze, I had to prove to a civilian (who was not a veteran) that the Navy really did intend to pay me a pension next year. Because after all I'd only been collecting one for six years, and who knew what might happen next year.

What paperwork did you end up using, that was acceptable? I usually print out my retiree statement from the DFAS site. Never had a problem. But I've only applied for car loans, not mortgages.

 

[ERD50]

There was another post on the same topic a little while ago. You might do some searches on the forum to see if you can find it.

IMO - I would pay off the mortgage. Especially with return on fixed investments. You are unlikely to match the return of getting rid of the mortgage with the same money without taking more risk.

Surfdaddy - you might also want to search for mortgage pay off too. There are those with another opinion on that. I'm pretty much agnostic on it, but I do feel strongly that both sides of the issue should be considered. It's not a no-brainer on either side, I don't think it should be presented as such. It actually makes little difference either way, from what I've been able to figure.

There is no reason to keep it all in low % fixed investments - look at your overall AA.


-ERD50

 

[Emeritus]

Surfdaddy - you might also want to search for mortgage pay off too. There are those with another opinion on that. I'm pretty much agnostic on it, but I do feel strongly that both sides of the issue should be considered. It's not a no-brainer on either side, I don't think it should be presented as such. It actually makes little difference either way, from what I've been able to figure.

-ERD50

I agree and would suggest that a liquidity analysis accompany the Asset allocation

 

[Nords]

What paperwork did you end up using, that was acceptable? I usually print out my retiree statement from the DFAS site. Never had a problem. But I've only applied for car loans, not mortgages.

Yep, the dreaded DFAS-CL 7220/148 (Rev 03-01) Retiree Account Statement.

It was mostly the hassle of remembering my DFAS login/password and printing out yet one more piece of paper for an employee victimized by their checklist mentality.

It must've been a tough year for the lender to question whether or not someone's pension would continue to be paid... almost as bad as asking whether or not your employer will continue to pay you.

All this is on my mind as I wait for PenFed to agree that our refinancing appraisal is good enough for them to be ready to close in a week or two.

 

[Katsmeow]

The main focus on the application approval is your dividend & interest income (as well as any employment income and pensions).

Does this have to be taxable income? I was thinking about this the other day. Right now I still work part time. We are going to buy a car soon and will pay cash for it.

However, what if we wanted to buy a car and didn't pay cash and I didn't work part time. We have DH's social security income of course. However, everything else is in an IRA. Our portfolio in the IRA does get dividends, but those aren't taxable income to us. We just reinvest them. When we need income we plan to just take it out of the IRA as a transfer from some cash we've set aside.

I assume that someone considering making a loan wouldn't consider dividend income that was reinvested in an IRA. What could we do to make this type of income counted for loan purposes? Would it help to have the dividends sent directly to us and taken out of the IRA? Or would they assume that since we could stop the transfers from the IRA that this isn't valid income? We don't have any substantial non-IRA or non-401k portfolio.

 

[rayvt]

It doesn't have to be taxable income, it just has to be a steady income stream. IOW, it has to be money that hits your checking account monthly. So income inside an IRA won't count.

Pensions & SS count. Received dividends in a taxable (non-IRA) account will probably count, but they want to see it on your 1040 income tax forms for the last year or two.

Other retirement income, like periodic withdrawal/distribution from an IRA or 401K, will count but only (!!) if it is automatic and periodic. So you need to show them the form from your custodian that confirms that they are sending you $XXXX monthly. The account needs to have enough assets for the income to last at least 3 years. So the account size would be 36 * $XXXX or more. They usually want to see 2 months worth of bank account statements showing the deposit.

It's kinda funny. They are not impressed by an account balance that is 10 times the size of the mortgage you'e requesting. All they care about is being able to see a documented monthly income stream. The fact that your "income" is just moving your own money from yourself to yourself doesn't matter to them. They want to see it coming from a custodian (even though that custodian merely does what you tell them to do) and being deposited in your personal checking account.

IOW, they understand a paycheck. So they want to see something that looks and acts pretty much like a paycheck.

When I said, "Look, my 'income' from my IRA is whatever I want it to be. Heck, I could stop it tomorrow if I wanted to, or I could double it if I wanted to." They said, "Umm, we don't care about that. We want it to look like it was a periodic paycheck. And the amount has to be high enough so that you are within the 26% & 36% ratios."

So I said, "Fine. You need me to have a $5000 income from my IRA? Done. Yuo need me to have $6000 income? Done. Anything to please you."

 

[Lsbcal]

...(snip)...
So question - I don't really need to refi my small mortgage, but it did occur to me that - could I? I mean I won't be able to report a job or formal earnings! I could easily write a check and pay it off if I wanted to, though.

Similarly, if we see a better credit card deal (rebate card or something like that) and we want to switch to a different card, how do we do that without a job or earnings to report? We have plenty of money and credit scores in the low 800's.

If your mortgage is small and it's close to payed off, then you are probably making much of your payments towards principal (not interest). In that case, it's not much of a help on your taxes but you'll have to review that aspect.

We recently refi'd from 5 3/8 down to 4 3/8. One bank was impressed with the assets and we could show 2 years of tax statements with high AGI. That was because of IRA -> Roth conversions rather then spending the money for living expenses. But they did not have to know that and indeed did not ask. They were just delighted to collect their fees with a borrower that was essentially no risk.

With credit cards, since retirement I've applied for a few with no problem.

 

[Nords]

Does this have to be taxable income? I was thinking about this the other day. Right now I still work part time. We are going to buy a car soon and will pay cash for it.
However, what if we wanted to buy a car and didn't pay cash and I didn't work part time. We have DH's social security income of course. However, everything else is in an IRA. Our portfolio in the IRA does get dividends, but those aren't taxable income to us. We just reinvest them. When we need income we plan to just take it out of the IRA as a transfer from some cash we've set aside.

It doesn't have to be taxable income, it just has to be a steady income stream. IOW, it has to be money that hits your checking account monthly. So income inside an IRA won't count.

It doesn't matter whether it's taxable or non-taxable income. I think you're over-nuking this.

On one part of the mortgage application you're going to list income from investments. Put the IRA income in that section.

In another part of the mortgage application you're going to list assets. Put the IRA account there. If the application asks whether or not it's an IRA then give the appropriate answer, but I can't remember whether or not a uniform residential loan application even asks about it.

Now that I think about it, I've always listed taxable income because that's the only income documented on a tax return. But if I needed to squeeze out an extra dollar or two to make the ratios then I'd dig out every last one of the brokerage statements.

 

[Koolau]

Other retirement income, like periodic withdrawal/distribution from an IRA or 401K, will count but only (!!) if it is automatic and periodic. So you need to show them the form from your custodian that confirms that they are sending you $XXXX monthly. The account needs to have enough assets for the income to last at least 3 years. So the account size would be 36 * $XXXX or more. They usually want to see 2 months worth of bank account statements showing the deposit.

Can't dispute this but it was NOT what I experienced. Elsewhere on this forum, I documented our PITA experience of getting a mortgage a little over a year ago. Even though we had enough to easily pay off the mortgage (one mortgage guy actually asked "Why not just pay cash instead of seeking a mortgage?") we almost didn't get the mortgage - until they found out we had been converting TIRA to ROTH. After looking at 3 years worth of 1040s, they "imputed" our income from our conversions. These were not monthly and they weren't particularly similar amounts nor the same time of the year. Still, for their purposes, they were considered to be "income". I thought this was particularly ridiculous for two reasons. 1) We could have spent the money in which case there would have been less to come after if we defaulted. 2) We converted from TIRA to ROTH which, to my mind, is like converting a bond fund to a stock fund in terms of your net worth, i.e., there really was no income involved.

You just have to keep in mind that the whole mortgage business has been turned on its ear. Nothing makes sense anymore - or if it does, it's in some bizarre way that makes no sense to the average Joe/Jill. Good luck with which ever way you go. Otherwise - BEST LUCK IN YOUR UNPLANNED RETIREMENT!!

 

[rayvt]

It doesn't matter whether it's taxable or non-taxable income. I think you're over-nuking this.

On one part of the mortgage application you're going to list income from investments. Put the IRA income in that section.

In another part of the mortgage application you're going to list assets. Put the IRA account there.

Now that I think about it, I've always listed taxable income because that's the only income documented on a tax return. But if I needed to squeeze out an extra dollar or two to make the ratios then I'd dig out every last one of the brokerage statements.

I don't think I'm over-nuking it. I was speaking from my experience with 3 refi's from 3 different lenders--all since I've been retired. They all had essentially the same requirements. Understandable, because they all go by the FMNA guidelines, and so adhere to whatever FMNA requires.

For folks who are FIRE'd, probably most of their income is from investments & tax-preferred retirement accounts. And generally the "income" from these is whatever you want it to be. Probably their income from pension and SS is nowhere near enough to fit within the 26/36 ratios. So to qualify for a mortgage you need to have documentable income from your retirement accounts. And "documentable" means that it meets the lender's guidelines for documentation, regardless of what you think about it.

Heck, they wouldn't consider our draws from our taxable joint account because "Your could just take the money out, and then you wouldn't have that income to make the mortgage payment." Absurd. Like I couldn't drain my IRA, either??

Maybe it'll be different once the baby boomers retire in huge numbers, but right now the lenders can't get their heads around anything other than a periodic withdrawal that looks like a paycheck.

And when I pointed out that they had copies of brokerage account statements showing balances of 4-5 times the loan amount, they just shrugged. I said, "Look you can see that I'll never be a foreclosure risk--I could pay it off with one phone call." They said, "Yeah, good for you--but we need to see documentation of a steady monthly income."

So I set up a monthly withdrawal from an IRA. And immediately roll it into a Roth. Getting the monthly check is what they want to see. They know that I just re-deposit it into the Roth, but they don't care. They see the income stream and that satisfies them. Stupid, but there ya go.
Like koolau said, that's just shuffling my own money around, no income is involved.

 

[chinaco]

I agree and would suggest that a liquidity analysis accompany the Asset allocation

This is the trap many do not consider.

 

[haha]

IAnd generally the "income" from these is whatever you want it to be. Probably their income from pension and SS is nowhere near enough to fit within the 26/36 ratios. So to qualify for a mortgage you need to have documentable income from your retirement accounts. And "documentable" means that it meets the lender's guidelines for documentation, regardless of what you think about it.

rayvt-could you explain these ratio guidelines to me?

Also, your post seems to suggest that you sat down with someone with decision authority, and conducted a back and forth conversation. All I have seen is forms, that will be submitted with no opportunity to explain the nuances. For example a good slug of my income is from MLPs, which are part of the 1040 (schedule E)-but much of the cash flow to me never reaches the AGI line. How do you get through to someone who might understand what he or she is looking at?

Thanks.

Ha

 

[rayvt]

That's the debt-to-income ratios. Income vs. PITI and income vs. all debts (including PITI). Roughly, the mortgage payment (PITI) should be no more that 1 fourth of your montly income and the total of all your debts (car loans, credit cards, and PITI) should be bo more that 1 third of your monthly income.

My descriptions were an aggregate of conversations I had during 3 refi's. Data on forms is good enough for most people, but FIRE'd retirement income doesn't usually fit in the "common" category. For example, the "income" I receive from my IRAs and other investment accounts is much larger than the income I receive from pension & SS.

I've never talked directly to anybody in "decision authority", just to the loan processors (the ones who collect the documentation from you and do the first-level review). That's the person you speak on the phone with. They are the ones who are the conduit to "underwriter" which is the person with the authority.

The first refi I was flying blind, and so was my loan processor. He was the one who spoke to the underwriter, because he didn't know how to enter all my income on the forms. There's no line for "money you pay to yourself" on the standard app form. It was the underwriter who told him (and he told me) that they just needed to see the letter from my IRA custodian confirming my standing direction to distribute $XXXX monthly to me. Once I gave them that, then the underwriter wanted to see my checking account statement showing the deposits of that amount.

The second refi, I knew all the magic words to say to the processor. The processor knew nothing about those things, so she talked to the underwriter who said, "Yes, that's the things we need to see."

Same on the third refi. In my first conversation with the processor, I said, "I've been through this before. These are the things that the last lender wanted to see, and if you check with your underwriter he will confirm it."
This one came back and said that the underwriter REALLY wanted to see the deposits going into my bank. Because evidently some borrowers have been playing games and said they took a monthly distribution from their IRA but didn't actually take it.
I thought this was rather silly. After all, it's just my money that I'm paying to myself. It's not income, it's just transferring my own money from one account to another. But they want to see it take that form, and I wanted the loan, so I set it up so they could see what the wanted to see.

 

[Surfdaddy]

Surfdaddy - you might also want to search for mortgage pay off too. There are those with another opinion on that. I'm pretty much agnostic on it, but I do feel strongly that both sides of the issue should be considered. It's not a no-brainer on either side, I don't think it should be presented as such. It actually makes little difference either way, from what I've been able to figure.

There is no reason to keep it all in low % fixed investments - look at your overall AA.


-ERD50

ERD - thanks for the suggestion. Liquidity is not a problem at all. One question is whether I want to pay off a $70ish K mortgage, currently at 4.25%. Paying it off would not substantially affect my liquidity. My assumption was that since I have 9 more years on the loan, rates might go up in a couple of years and then I've preserved this relatively great rate when I might be able to get 5% or greater on a future CD. But of course it's all a guess.

And of course I'm getting unemployment right now. First time since I was 16 that I've been unemployed, and as a high wage earner the most recent 20 years or so, it's nice to be getting a check FROM the govt rather than paying oodles into the govt. But I am actually looking for w*rk, just not super-aggressively.

 

[haha]

rayvt-thank you for the clear explanation.

Ha