Ideas how to finance buying a new house

[FD1000]

I like planning ahead. Right now, our taxable account is less than 15% of our total portfolio. Over the next 10 years, Roth conversions should eliminate our taxable accounts and most, if not all, of our traditional IRA balances.

Assume we stay in our current house for another 10 years and then decide to move to a new home worth around $1 million. Ideally, we’d like to buy the new house first and sell the old one later for convenience.

At first, I thought a line of credit would solve the issue, but I recently learned that Schwab allows borrowing against non-retirement investment accounts.

Here’s the dilemma: if I take out $1 million from Roth, buy the new house, and sell the old one for a similar amount, I end up rebuilding the taxable account balance and creating ongoing taxable income again.

Any other ideas?

 

[finnski1]

Can't you just take out a mortgage on the new one and pay it back when the old one sells?

 

[RetiredHappy]

Getting a mortgage will also be my first choice.

Besides that, I would keep the taxable account and not drain it anymore so that you can use that for your downpayment. If for some reason you don't want to take a mortgage, then I would get a Heloc on your current home. So between your taxable and Heloc, you maybe able to come up with $1M, and if there is shortfall, withdraw the balance from your Roth.

I would then hold off on further Roth conversion or at least not to do so much of it, because after you sell your home, you can pay back your Heloc and continue with your Roth conversion.

When we did a "house swap" in 2021, we found a buyer for our home first and then shop for our new home. We did what is called concurrent closing. We kept some of the sale proceeds for home improvement on the new home and also took a small mortgage, at 2.75%.

 

[Diogenes]

Only 15% of your portfolio is in taxable accounts? That is... amazing! Also explains why you're able to be so limber in trading in-and-out of various funds. My own situation is entirely the reverse. The vast majority is in plain taxable brokerage accounts, which means being tax-sensitive, ACA-ineligible and disinclined to trading.

But as I'm also considering buying a house "soon", the likely route will be... to sell my VWIUX. I really hate it, and the good news is that because of muted (if any) capital gains, the tax consequences of selling will be minor. I view real estate as the analog of bonds (as opposed to stocks). Not presently being a homeowner, I have the bonds... they're supposed to serve as diversification (diworsification). The appeal of a house is to diversify without having to contend with bonds... the big downside being the property taxes.

 

[FD1000]

Getting a mortgage with no pay check could be a problem, especially on $1 million.
The whole idea of conversion is to have no to minimal taxes after that. If I don't do the conversion now, I will lose all the benefits.

Selling first and buying later is a great choice. We don't want to move twice and store half of our stuff. If can't find another choice, we would take this route.

Diogenes: Only 15% of your portfolio is in taxable accounts? That is... amazing! Also explains why you're able to be so limber in trading in-and-out of various funds​

That's beyond the scope of this thread. The answer is easy; we save mostly in 401Ks.
Forget about diversification; the goal of bonds and property tax, please.

 

[COcheesehead]

Talk to a realtor and get a handle on the value of your house and current days on market. It will help with your game plan.
We knew in our market average days on market was 55 days, but that was to close. Not to sell. That gave us a lot of flexibility once we had an offer.
We ended up selling day 2 on market and did a back to back closing of selling and buying. We required no bridge, no financing. Equity transferred right to the new house.

 

[pb4uski]

I like planning ahead. Right now, our taxable account is less than 15% of our total portfolio. Over the next 10 years, Roth conversions should eliminate our taxable accounts and most, if not all, of our traditional IRA balances.

Assume we stay in our current house for another 10 years and then decide to move to a new home worth around $1 million. Ideally, we’d like to buy the new house first and sell the old one later for convenience.

At first, I thought a line of credit would solve the issue, but I recently learned that Schwab allows borrowing against non-retirement investment accounts.

Here’s the dilemma: if I take out $1 million from Roth, buy the new house, and sell the old one for a similar amount, I end up rebuilding the taxable account balance and creating ongoing taxable income again.

Any other ideas?

You have some options but they each have warts. I think your best course is to talk with a real estate broker and a mortgage broker about this and see what they suggest.

IF your time horizon for the need of a bridge is less than 60 days, you can withdraw from the Roth, sell the old house and use the proceeds from the sale of the old house to make a rollover controbution back to the Roth. This is somewhat of your variation of using the Roth but with the opportunity to replace the money withdrawn with careful planning.

Take out a mortgage (or a HELOC) on the old house and use the proceeds to buy the new house, but that would only work is the old house is worth $1.25m or more so you can borrow $1.0m using the $1.25m+ home as collateral.

For this or even for buying the new house with a mortgage, you can set up periodc transfers from the Roth as "income" (odd, but true).

What my sister has done a couple times, including now, is to sell her home, move her things into storage, move into a rental temporarily and then buy the new home.

Back in the old days you could easily make your purchase offer contingent on the sale of your current home. I'm not sure how possible that is these days, but it doesn't hurt to ask.

There also are mortgage brokers who specialize in asset-based loans. There is a formula to interpolate your assets into "income" that is used as a basis for the mortgage loan.

That's all I got. Good luck.

 

[Koolau]

Getting a mortgage with no pay check could be a problem, especially on $1 million.
The whole idea of conversion is to have no to minimal taxes after that. If I don't do the conversion now, I will lose all the benefits.

Selling first and buying later is a great choice. We don't want to move twice and store half of our stuff. If can't find another choice, we would take this route.



That's beyond the scope of this thread. The answer is easy; we save mostly in 401Ks.
Forget about diversification; the goal of bonds and property tax, please.

We almost didn't qualify for a mortgage back in '10. Turns out that we had too little income. BUT when they looked at our last 3 1040s, they realized we had all kinds of income (according to the IRS). We had converted a bunch of our tIRAs to Roth. SO, Voilà! We got our mortgage.

 

[FD1000]

Taking HELOC sounds good.
Depending on the numbers even if I need to take out $300-400K from Roth it's not a problem.
We would spend it within several years and taxes would still be minimal.

I know our market very well and no one can predict a fast sell. Our neighborhood is an old one while most others are newer.

 

[jazz4cash]

You can create income very easily to qualify for a mortgage. You can also find a lender that does “asset depletion” loans that assume a % of your nest egg is income for loan qualification. You may also be able to do a 60 day rollover to purchase the property and then get the mortgage.

 

[engineernerd]

There've been a couple of other threads about buying a house in retirement, including this one:

Getting a new mortgage when retired.

So this idea of knocking down our house and building a new one (same waterfront lot) is getting more traction, and we are now fishing for quotes. I'll spare the real estate/reasoning details on that. We have a mortgage of $225k now and it is assumed that if we knock the house down, we will...

www.early-retirement.org

The most common approach was qualifying for a mortgage by initiating a recurring monthly withdrawal from one or more IRAs, 401(k)s, etc. to serve as one's "income." The mortgage broker needed a copy of your instructions to your broker, plus evidence of the total balance in the accounts (big enough to support at least 3 years' worth of the payments), plus sometimes (but not always) evidence that at least one such payment had landed in your checking account.

Taxable brokerage account money cannot be used this way, for whatever reason. Not sure about Roth money.

The people who reported doing this said they canceled the recurring payments right after the closing.

Hope that helps!

 

[FD1000]

In 10 years all the money will be in Roth.
The new house will likely be about $1 million.
We will never work again.
How can we create an income?

 

[jazz4cash]

In 10 years all the money will be in Roth.
The new house will likely be about $1 million.
We will never work again.
How can we create an income?

You can set up monthly distributions from any type of account to a plain old checking account anywhere. Do it well before you need to so you can show several monthly statements with this “income”. Unless you are using a Roth it will also show up on your tax returns as income. EZ.

 

[engineernerd]

In 10 years all the money will be in Roth.
The new house will likely be about $1 million.
We will never work again.
How can we create an income?

I'd recommend asking a good mortgage broker this question. The impression I got from the forum posters who used their 401(k)s to generate "income" was that this approach is based on a requirement written in law for a mortgage to be a "conforming" mortgage, which is why so many were advised to do it.

That said, the law can certainly change over 10 years so it's hard to plan ahead that far with any certainty.

 

[CO-guy]

Selling first and buying later is a great choice. We don't want to move twice and store half of our stuff. If can't find another choice, we would take this route.

There are many advantages to selling first beyond just having a single move.

Needing to both buy and sell two different homes adds additional complications to an expensive transaction.

Your ability to vacate your current home quickly, rather than being contingent on some other real estate transaction, will appeal to some buyers which can be reflected in a higher sale price. Similarly, your ability to come in with an all-cash offer once the right property comes on the market will make you a more appealing bidder against other bidders with contingencies related to the sale of their current home.

 

[Jerry1]

There are many advantages to selling first beyond just having a single move.

Needing to both buy and sell two different homes adds additional complications to an expensive transaction.

Your ability to vacate your current home quickly, rather than being contingent on some other real estate transaction, will appeal to some buyers which can be reflected in a higher sale price. Similarly, your ability to come in with an all-cash offer once the right property comes on the market will make you a more appealing bidder against other bidders with contingencies related to the sale of their current home.

I was going to write the same thing with emphasis on the ability to make an all cash offer on the new place. Around here, cash is king and even then, it can be tough. Just had a friend get out bid on a house. Listed for $650k, he bid $700k cash and got out bid at $710k cash with no inspection. Someone who needs to spend time getting any kind of financing isn't even in that ball game.

 

[xlf11]

Try asset depletion method to qualify a mortgage if your regular income alone does not qualify you for the amount. We did it after retirement with WF without much of issue, basically using your regular SSB, pension and interest/dividend plus whatever needed to generate income with your asset like 401k, ira and brokerage etc.

 

[Kings over Queens]

Heloc and a bridge loan.

Whats next?

 

[Time2]

When I bought a house, I moved my taxable account from Vanguard to IBKR, where the margin interest rates were Much lower. At the time I paid 1.99%, I also took out a Heloc and got a 0.99% 6 month teaser rate. As I write the rate for a margin loan is 4.63%, However, I read that you can't use margin on Roth accounts, so you will need a pretty hefty taxable account. It sounds like you don't have that.

 

[FD1000]

There are many advantages to selling first beyond just having a single move.

Needing to both buy and sell two different homes adds additional complications to an expensive transaction.

Your ability to vacate your current home quickly, rather than being contingent on some other real estate transaction, will appeal to some buyers which can be reflected in a higher sale price. Similarly, your ability to come in with an all-cash offer once the right property comes on the market will make you a more appealing bidder against other bidders with contingencies related to the sale of their current home.

I agree. This seems like the simplest and most straightforward approach.
We’ll definitely move to a smaller place. Downsizing, especially getting rid of a lot of stuff, will probably be the biggest challenge… at least for my DW.

We’ve never built or bought a brand-new house, and this move will likely be no different.
If renovations are needed, it’s much easier to do them while the house is vacant before moving in.

 

[ddk70]

We took a HELOC on our primary residence in 2019, purchased our retirement home however we’re still employed at the time. Sold our business December of 2020, our house on the market Easter Monday 2021, had four offers one cash on Tuesday. Cash offer wins. Stayed in the house under our terms until August 1, 2021 giving us time to dispose of 30 plus years of stuff.

Problem solved - HELOC paid off and cash in the bank. We did however size down a bit. All of it happened during COVID lockdown, things work out.

The people who helped us navigate were the bank loan officer for the HELOC, FA, and realtor. Loan officer doing her job, FA helped very much with the emotional stuff of selling during COVID, and realtor also pitched in by lowering his commission. We had bought our home from him 30 years earlier.

 

[CO-guy]

If renovations are needed, it’s much easier to do them while the house is vacant before moving in.

Yet another reason to sell first before buying.

 

[FD1000]

We took a HELOC on our primary residence in 2019, purchased our retirement home however we’re still employed at the time. Sold our business December of 2020, our house on the market Easter Monday 2021, had four offers one cash on Tuesday. Cash offer wins. Stayed in the house under our terms until August 1, 2021 giving us time to dispose of 30 plus years of stuff.

Problem solved - HELOC paid off and cash in the bank. We did however size down a bit. All of it happened during COVID lockdown, things work out.

The people who helped us navigate were the bank loan officer for the HELOC, FA, and realtor. Loan officer doing her job, FA helped very much with the emotional stuff of selling during COVID, and realtor also pitched in by lowering his commission. We had bought our home from him 30 years earlier.

* You’re talking about buying a new home 1.5–2 years before selling the old one.
* 2021 was also an unusually favorable market for sellers.
* How much are your first and second homes worth?

I don’t think your situation really resembles the OP’s scenario.

 

[MdaPetralia]

Try asset depletion method to qualify a mortgage if your regular income alone does not qualify you for the amount.

+1

That worked for me when I no longer had earned income and needed to qualify.

 

[freedomatlast]

We made a low cash offer for the last house we bought, and the seller accepted because we were able to close quickly since we didn't have to waste time and expense with a mortgage company. We gradually moved from one house to the other and after a while we listed the old house on Zillow.and it sold relatively quickly. After closing on the old house, we partially replenished the account we took the money from to buy the new house. Both were smooth transactions, low stress with no realtor expenses involved.