Author Topic: Hidden consequences of manufacturing low income for ACA subsidy?  (Read 3250 times)

sockfight

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Hidden consequences of manufacturing low income for ACA subsidy?
« on: September 26, 2021, 01:13:36 PM »
I'm assuming many readers here are familiar with the concept that FIREd individuals can produce low AGI by being strategic about realizing capital gains and other investment-sourced income. The reason one might do so is to qualify for ACA subsidies and excellent health insurance.

But this came back to bite me. Last year, I bought a house. I could have paid cash for it but wanted a mortgage. Interest rates are in the 2s, so I wanted to take on debt and keep my money invested. However, I almost couldn't qualify for a mortgage because lenders look at prior tax returns and mine were low due to the ACA game. Eventually, I found a lender who could give me credit for assets, though I still had to generate high income for 2020 by realizing capital gains to qualify. It was the first time I realized there could be consequences to shooting for low AGI.

Now in 2021, I'm trying to decide whether to go back to low income for subsidy or be done with the game. I'm a bit nervous because I didn't like being in that situation. What if the need/opportunity arises to refinance, buy a rental property, or move? I have no plans at the moment, but it seems that lenders look back over the past two years of returns, so if I realize low income again, it seems like it could be an issue as much as two years into the future.

It's enough to make me question whether it's worth playing the subsidy game. Yes, it can be over $10,000 of health care cost savings. But on the other hand, if one doesn't play the ACA game, the first ~$100k of capital gains would be tax-free (factoring in std. deduction) and one could get an HDHP to save for an HSA, so there's an opportunity cost to taking the subsidy. In addition to avoiding pitfalls like the situation above.

My questions are:
-Has anyone encountered any other unexpected consequences of pursuing the subsidy aside from my story?
-What would you do? Go back to pursuing the subsidy or let the game go?

Thank you!

ixtap

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #1 on: September 26, 2021, 01:20:29 PM »
What are your alternatives? For our financial situation, we will be causing, not avoiding, taxable events (mostly Roth conversions whether we need them or not) in order to qualify for ACA. Are you generally jumping through hoops that are not otherwise optimal in order to have lower income than you would by making other choices?

sockfight

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #2 on: September 26, 2021, 01:27:05 PM »
I've been freeing up investment income in my taxable account by realizing long term capital gains. I can free up enough to get through the next year without disqualifying for subsidies. It does leave the 0% cap gains tax bracket unfilled, so I'm not stepping up the cost basis as fast as I could (thanks to recent strong years in the market)

bmjohnson35

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #3 on: September 26, 2021, 07:32:09 PM »

The issue you raise is a financing issue, not necessarily an issue associated with utilizing the ACA.  Even if you don't use the ACA, having no active loans and zero to low income (wages, SS, pension, annuity, etc.) will likely impact your ability to get a loan. 

terran

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #4 on: September 26, 2021, 09:32:13 PM »
Would having more realized capital gain or IRA conversion/withdrawal income really have helped you more easily get a mortgage? My impression is that banks really want to see employment income not investment income for an income based mortgage.

stoaX

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #5 on: September 27, 2021, 03:42:28 AM »
I have "manufactured low income" for 2 years now and haven't experienced any negative consequences.  That being said, I haven't tried to get a mortgage or rent an apartment. 

boarder42

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #6 on: September 27, 2021, 05:35:19 AM »
what lender did you find for assets this is my plan in the future if rates stay low to extract home appreciation to invest

reeshau

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #7 on: September 27, 2021, 06:21:37 AM »
We bought a house last summer, and ended up buying it outright.  There are options to qualify for mortgages based on assets, but it is, of course, not the most common way to go about it.  Unfortunately, every lender I contacted had halted asset-backed qualification last year, due to nervousness about the stock market through the pandemic.

I have not tried to go back and get a mortgage, which would be classified as a cash-out refinance, even though there is nothing to refinance, because it is our existing home.

We end up generating "enough" cap gains through managing our individual stock portfolio.  If I was faced with a situation where I should sell my investments (the company took a turn for the worse; the market price is way above what I think the value is, etc.)  then I would sell, and not let the ACA tail wag the investment dog.  Loss of subsidies would be a cost of doing business, but if you are talking that much, then it's still the lesser cost, vs. The risk of the investment loss.

In the case of a rental business, I would think that would be similar: the lifetime value of a rental is more than any year's subsidy, so losing out on the ability to make the investment is likely a higher cost.  But how likely are you to get into rentals?  If this is still a matter of exploration or daydreaming, then you are giving up a certain benefit for an unlikely gain.  If you already have an active portfolio and you are preparing for a likely wave of foreclosures, then it might be a prudent move to prepare, specifically for this year and the next.

Fishindude

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #8 on: September 27, 2021, 06:24:57 AM »
This is an example of where it pays to have a relationship with a real person in a brick and mortar bank.
Any banker worth a hoot will get you a loan if you have good history, and collateral and assets to show that you can back up and repay the loan.

sockfight

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #9 on: September 27, 2021, 07:21:22 AM »
The issue you raise is a financing issue, not necessarily an issue associated with utilizing the ACA.  Even if you don't use the ACA, having no active loans and zero to low income (wages, SS, pension, annuity, etc.) will likely impact your ability to get a loan.

Thanks to the market performance over the last five years, I've been building capital gains in the taxable portion of my portfolio, which can be realized as income, up to $75k per year tax free (roughly $100k after std. deduction), but this is incompatible with taking the subsidy. Of course, the gains can also sit and pile up in any particular year.

Would having more realized capital gain or IRA conversion/withdrawal income really have helped you more easily get a mortgage? My impression is that banks really want to see employment income not investment income for an income based mortgage.

I just refinanced my mortgage with Better and qualified solely based on two years of realized capital gains and no other income types.

what lender did you find for assets this is my plan in the future if rates stay low to extract home appreciation to invest

I originally financed with Wells Fargo. You can find a private mortgage banker on their website, and they were able to consider assets. In general, institutions with 'private banks' seem to have people that can handle unusual situations. Side note, I doubt rates will stay low much longer given the Fed's announcement that tapering will start soon.

not let the ACA tail wag the investment dog.  Loss of subsidies would be a cost of doing business, but if you are talking that much, then it's still the lesser cost, vs. The risk of the investment loss.

In the case of a rental business, I would think that would be similar: the lifetime value of a rental is more than any year's subsidy, so losing out on the ability to make the investment is likely a higher cost.  But how likely are you to get into rentals?  If this is still a matter of exploration or daydreaming, then you are giving up a certain benefit for an unlikely gain.  If you already have an active portfolio and you are preparing for a likely wave of foreclosures, then it might be a prudent move to prepare, specifically for this year and the next.

These are excellent points, thank you!

yachi

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #10 on: September 27, 2021, 07:33:12 AM »
If you do get into rentals, you can get quite a leg up if you buy houses that don't qualify for financing.  For example, houses for sale as part of estate auctions are discounted from what they would bring in a MLS listing, as are houses that need so sell quickly for some reason.
Once you're repaired the house, and have a tenant in it, you should be able to show good rental cash flow to refinance the house.  You'd still be claiming depreciation on your taxes, so your actual taxable income need not be large.

boarder42

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #11 on: September 27, 2021, 07:50:40 AM »
@sockfight agree on rates staying low much longer is probably not going to happen.  Thanks for the bank i'll look into it depending on what the new caps are on conventional mortgages in 2022.  Hoping to get the rest up to that cap.

sockfight

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #12 on: September 27, 2021, 08:21:40 AM »
@sockfight agree on rates staying low much longer is probably not going to happen.  Thanks for the bank i'll look into it depending on what the new caps are on conventional mortgages in 2022.  Hoping to get the rest up to that cap.

It's worth noting that the banks that might be willing to consider assets aren't necessarily the ones with the best rates, too.

If you do get into rentals, you can get quite a leg up if you buy houses that don't qualify for financing.  For example, houses for sale as part of estate auctions are discounted from what they would bring in a MLS listing, as are houses that need so sell quickly for some reason.
Once you're repaired the house, and have a tenant in it, you should be able to show good rental cash flow to refinance the house.  You'd still be claiming depreciation on your taxes, so your actual taxable income need not be large.


Thank you for that. Of course, I suppose you need to have the cash to win at auction in that case! I'm in Austin, where the market has gone nuts.

bmjohnson35

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #13 on: September 27, 2021, 10:50:57 AM »
 
If you sell you primary residence before owning/living in it for 5 yrs, the ACA will count the associated capital gains toward your MAGI for that year.  You are exempt from capital gains up to $250k single and $500k married on your taxes, but the ACA will still count it toward your MAGI in regards to subsidy eligibility. 

I think of your "consequence" as more of a trade-off.  You don't mention how much you financed, but financing a home vs. buying a home outright will almost certainly cause you to increase your need for more income.  This in turn, will make it harder to qualify for ACA subsidies and may also increase your tax liability for the year. 

I know many in the mmm community sees passing up historically low interest rates as financial heresy.  We will likely be switching homes late next year or sometime in 2023.  We prefer to be debt free and keep our overhead and WR as low as possible.  We may end up financing a small portion anyway.  Whether we rent, pay cash, finance or partially finance, the choice we make will have trade-offs.

sockfight

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #14 on: September 27, 2021, 11:13:53 AM »

If you sell you primary residence before owning/living in it for 5 yrs, the ACA will count the associated capital gains toward your MAGI for that year.  You are exempt from capital gains up to $250k single and $500k married on your taxes, but the ACA will still count it toward your MAGI in regards to subsidy eligibility. 

I think of your "consequence" as more of a trade-off.  You don't mention how much you financed, but financing a home vs. buying a home outright will almost certainly cause you to increase your need for more income.  This in turn, will make it harder to qualify for ACA subsidies and may also increase your tax liability for the year. 

I know many in the mmm community sees passing up historically low interest rates as financial heresy.  We will likely be switching homes late next year or sometime in 2023.  We prefer to be debt free and keep our overhead and WR as low as possible.  We may end up financing a small portion anyway.  Whether we rent, pay cash, finance or partially finance, the choice we make will have trade-offs.

I thought the rule was tax-exempt cap gains if you lived in your house for 2 of the preceeding 5 years? And yeah, I figured that would still count towards MAGI. File it under "can't have your cake and eat it too".

Fair point about trade-offs. That's exactly what it is. I just need to figure out which route makes me better off.

bmjohnson35

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #15 on: September 27, 2021, 12:16:31 PM »
Directly from the Healthcare.gov website:  (Note that I missed the $250k limit under ACA)

"Capital Gains

A capital gain is the amount you get from selling property, like stock, a house, or a mutual fund. For example, if you buy stock for $1,000 and sell it for $1,250, you have capital gain of $250. You don't need to include a capital gain if it's from the sale of your main home you owned for at least 5 years (and the profit is less than $250,000). Report any capital gains noted in Form 1099-DIV, which you should get from some companies, like mutual funds, before the tax filing deadline."

My understanding is based off this language and I am NOT a tax/ACA expert.

« Last Edit: September 27, 2021, 12:19:44 PM by bmjohnson35 »

Paul der Krake

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #16 on: September 27, 2021, 12:22:27 PM »
Agreed that this is a lender problem, not an ACA problem. Lenders don't like non-job income. This pops up on the Post-FIRE forum pretty often. If you search for SwordGuy, he has a pretty good primer on how to qualify for mortgages without a job.

Hint: it sucks.

boarder42

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #17 on: September 27, 2021, 12:50:30 PM »
Agreed that this is a lender problem, not an ACA problem. Lenders don't like non-job income. This pops up on the Post-FIRE forum pretty often. If you search for SwordGuy, he has a pretty good primer on how to qualify for mortgages without a job.

Hint: it sucks.

i mean the mild efficiency refinances bring to my life are not worth keeping a job for once FI is obtained.  Moving is a different issue but we plan to stay in this house for 15 more years and i can cross that bridge when we get there.  we'll be 50 so I guess we could just stay 10 more years til we have qualified retirement dollars flowing in.  I don't know how you can look at some one with 7-8 figures of invested assets and think they are riskier than the guy living paycheck to paycheck using your math to decide he can afford a 700k house. 

sockfight

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #18 on: September 27, 2021, 04:02:42 PM »
Directly from the Healthcare.gov website:  (Note that I missed the $250k limit under ACA)

"Capital Gains

A capital gain is the amount you get from selling property, like stock, a house, or a mutual fund. For example, if you buy stock for $1,000 and sell it for $1,250, you have capital gain of $250. You don't need to include a capital gain if it's from the sale of your main home you owned for at least 5 years (and the profit is less than $250,000). Report any capital gains noted in Form 1099-DIV, which you should get from some companies, like mutual funds, before the tax filing deadline."

My understanding is based off this language and I am NOT a tax/ACA expert.

Thank you for clarifying that! I found the web page. Interesting. There is a separate provision in the tax code that I was referring to, which allows you to avoid paying CG tax on the sale of your residence under certain conditions.

sockfight

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #19 on: September 27, 2021, 04:30:03 PM »
Agreed that this is a lender problem, not an ACA problem. Lenders don't like non-job income. This pops up on the Post-FIRE forum pretty often. If you search for SwordGuy, he has a pretty good primer on how to qualify for mortgages without a job.

Hint: it sucks.

Thank you, found and read some of his content.

I'm not sure "lender's don't like non-job income" is entirely true. What's definitely a challenge is low income, even if you have assets. But I just closed a refi, and I happened to have two years of tax returns that each showed cap gains income and no other income. In fact, I had a small Sch C loss which I asked the lender to ignore because I said it would be an unproductive headache for both sides. Underwriting took less than a day with no questions asked. Documentation was two tax returns and a screenshot of current unrealized gains. It seems they can underwrite investment income by averaging your last couple of years.

mboley

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #20 on: September 27, 2021, 10:23:13 PM »
Agreed that this is a lender problem, not an ACA problem. Lenders don't like non-job income. This pops up on the Post-FIRE forum pretty often. If you search for SwordGuy, he has a pretty good primer on how to qualify for mortgages without a job.

Hint: it sucks.

Thank you, found and read some of his content.

I'm not sure "lender's don't like non-job income" is entirely true. What's definitely a challenge is low income, even if you have assets. But I just closed a refi, and I happened to have two years of tax returns that each showed cap gains income and no other income. In fact, I had a small Sch C loss which I asked the lender to ignore because I said it would be an unproductive headache for both sides. Underwriting took less than a day with no questions asked. Documentation was two tax returns and a screenshot of current unrealized gains. It seems they can underwrite investment income by averaging your last couple of years.
I'm retired and also closed a loan earlier this year. 2.5% 30 years on a "vacation home" for my daughter.   There are lenders out there for non-W2 borrowers. They want to see  systematic withdrawls from an IRA/ 401K account in addition to any other steady income. I was taking a w/d from a taxable account and they asked me switch over that w/d to my IRA, show proof, and I could  switch it back after closing. In my case, I also have steady rental income;  I thought qualifying might be a problem, it wasn't.

My understanding a common rule  is that a 1 million portfolio counts for 1,000,000 X 70% 360= $1944 per mo income W2  equivalent if all you have to show the loan officer is a portfolio. Thats on 30 year loan.

I find it interesting that a borrower with steady W2 income but only $100,000 in the bank is in most cases considered more credit worthy than a retired person with a sizable portfolio.

Sent from my SM-A205U using Tapatalk

boarder42

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #21 on: September 28, 2021, 06:36:26 AM »
Agreed that this is a lender problem, not an ACA problem. Lenders don't like non-job income. This pops up on the Post-FIRE forum pretty often. If you search for SwordGuy, he has a pretty good primer on how to qualify for mortgages without a job.

Hint: it sucks.

Thank you, found and read some of his content.

I'm not sure "lender's don't like non-job income" is entirely true. What's definitely a challenge is low income, even if you have assets. But I just closed a refi, and I happened to have two years of tax returns that each showed cap gains income and no other income. In fact, I had a small Sch C loss which I asked the lender to ignore because I said it would be an unproductive headache for both sides. Underwriting took less than a day with no questions asked. Documentation was two tax returns and a screenshot of current unrealized gains. It seems they can underwrite investment income by averaging your last couple of years.
I'm retired and also closed a loan earlier this year. 2.5% 30 years on a "vacation home" for my daughter.   There are lenders out there for non-W2 borrowers. They want to see  systematic withdrawls from an IRA/ 401K account in addition to any other steady income. I was taking a w/d from a taxable account and they asked me switch over that w/d to my IRA, show proof, and I could  switch it back after closing. In my case, I also have steady rental income;  I thought qualifying might be a problem, it wasn't.

My understanding a common rule  is that a 1 million portfolio counts for 1,000,000 X 70% 360= $1944 per mo income W2  equivalent if all you have to show the loan officer is a portfolio. Thats on 30 year loan.

I find it interesting that a borrower with steady W2 income but only $100,000 in the bank is in most cases considered more credit worthy than a retired person with a sizable portfolio.

Sent from my SM-A205U using Tapatalk

your equation is correct.  What age are you though this becomes significantly easier to show income once you reach normal retirement age as you can setup "standard withdrawal" and have your broker write you a note

Daisy

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #22 on: September 28, 2021, 03:26:57 PM »
I am not trying to optimize for ACA, but I did run into a problem with trying to get a mortgage while FIREd. Some lenders do look at assets, but in general they want to see some consistency for 3 years or so. Since I didn't have this amount of time since FIREd, I decided to go the Investment Line of Credit with my local bank instead. Kind of like a margin loan, but not exactly. I can borrow up to 70% of what I have invested with them. I still had some assets in managed non-Vanguard account (before I learned about index investing), so I transferred those assets there.

The closing was really easy as I ended up paying "cash" for the house. The investment account is the collateral I have for the loan. The bank is managing those assets so they know it is not in "risky" (their view) investments.

It is a lot more flexible, they don't care about home inspections or insurance, so buying a house was really easy. Downside is that it is based on the Fed's prime rate, which can change...although I don't see that happening any time soon.

I can also use this line of credit for anything I want.

I may revisit the mortgage question in a couple of years when I have more FIRE economic history to show.

sockfight

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #23 on: September 28, 2021, 03:29:00 PM »
I am not trying to optimize for ACA, but I did run into a problem with trying to get a mortgage while FIREd. Some lenders do look at assets, but in general they want to see some consistency for 3 years or so. Since I didn't have this amount of time since FIREd, I decided to go the Investment Line of Credit with my local bank instead. Kind of like a margin loan, but not exactly. I can borrow up to 70% of what I have invested with them. I still had some assets in managed non-Vanguard account (before I learned about index investing), so I transferred those assets there.

The closing was really easy as I ended up paying "cash" for the house. The investment account is the collateral I have for the loan. The bank is managing those assets so they know it is not in "risky" (their view) investments.

It is a lot more flexible, they don't care about home inspections or insurance, so buying a house was really easy. Downside is that it is based on the Fed's prime rate, which can change...although I don't see that happening any time soon.

I can also use this line of credit for anything I want.

I may revisit the mortgage question in a couple of years when I have more FIRE economic history to show.

Out of curiosity, what kind of rate did you get for that? I assume it's your rate + prime overall...

Daisy

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #24 on: September 28, 2021, 05:04:46 PM »
I am not trying to optimize for ACA, but I did run into a problem with trying to get a mortgage while FIREd. Some lenders do look at assets, but in general they want to see some consistency for 3 years or so. Since I didn't have this amount of time since FIREd, I decided to go the Investment Line of Credit with my local bank instead. Kind of like a margin loan, but not exactly. I can borrow up to 70% of what I have invested with them. I still had some assets in managed non-Vanguard account (before I learned about index investing), so I transferred those assets there.

The closing was really easy as I ended up paying "cash" for the house. The investment account is the collateral I have for the loan. The bank is managing those assets so they know it is not in "risky" (their view) investments.

It is a lot more flexible, they don't care about home inspections or insurance, so buying a house was really easy. Downside is that it is based on the Fed's prime rate, which can change...although I don't see that happening any time soon.

I can also use this line of credit for anything I want.

I may revisit the mortgage question in a couple of years when I have more FIRE economic history to show.

Out of curiosity, what kind of rate did you get for that? I assume it's your rate + prime overall...

Prime rate - 0.5% (they take this off if investements are with them)
3.25 - 0.5
2.75%

boarder42

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #25 on: September 28, 2021, 07:06:22 PM »
I am not trying to optimize for ACA, but I did run into a problem with trying to get a mortgage while FIREd. Some lenders do look at assets, but in general they want to see some consistency for 3 years or so. Since I didn't have this amount of time since FIREd, I decided to go the Investment Line of Credit with my local bank instead. Kind of like a margin loan, but not exactly. I can borrow up to 70% of what I have invested with them. I still had some assets in managed non-Vanguard account (before I learned about index investing), so I transferred those assets there.

The closing was really easy as I ended up paying "cash" for the house. The investment account is the collateral I have for the loan. The bank is managing those assets so they know it is not in "risky" (their view) investments.

It is a lot more flexible, they don't care about home inspections or insurance, so buying a house was really easy. Downside is that it is based on the Fed's prime rate, which can change...although I don't see that happening any time soon.

I can also use this line of credit for anything I want.

I may revisit the mortgage question in a couple of years when I have more FIRE economic history to show.

Out of curiosity, what kind of rate did you get for that? I assume it's your rate + prime overall...

Prime rate - 0.5% (they take this off if investements are with them)
3.25 - 0.5
2.75%

70% on a line of credit is interesting. Is that based on a count value at time of credit?  What makes them call it?  I can get 50% margin out of ibkr. But 70% may get me thru the 5 year bridge never tapping Roth.

Daisy

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #26 on: September 28, 2021, 07:39:37 PM »
I am not trying to optimize for ACA, but I did run into a problem with trying to get a mortgage while FIREd. Some lenders do look at assets, but in general they want to see some consistency for 3 years or so. Since I didn't have this amount of time since FIREd, I decided to go the Investment Line of Credit with my local bank instead. Kind of like a margin loan, but not exactly. I can borrow up to 70% of what I have invested with them. I still had some assets in managed non-Vanguard account (before I learned about index investing), so I transferred those assets there.

The closing was really easy as I ended up paying "cash" for the house. The investment account is the collateral I have for the loan. The bank is managing those assets so they know it is not in "risky" (their view) investments.

It is a lot more flexible, they don't care about home inspections or insurance, so buying a house was really easy. Downside is that it is based on the Fed's prime rate, which can change...although I don't see that happening any time soon.

I can also use this line of credit for anything I want.

I may revisit the mortgage question in a couple of years when I have more FIRE economic history to show.

Out of curiosity, what kind of rate did you get for that? I assume it's your rate + prime overall...

Prime rate - 0.5% (they take this off if investements are with them)
3.25 - 0.5
2.75%

70% on a line of credit is interesting. Is that based on a count value at time of credit?  What makes them call it?  I can get 50% margin out of ibkr. But 70% may get me thru the 5 year bridge never tapping Roth.

70% of whatever the balance is. Obviously you leave yourself some room in case of a market correction. It's with a local bank that does personal type banking so they won't do an automatic Margin Call if your balance goes much lower or they will ask you to transfer more investments in or pay some of the line of credit down. They charge around a 1% management fee. Like I said it was already money I had managed elsewhere. I still have a big chunk in Vanguard.

It's actually a  form of tax-free income if your portfolio keeps growing. After deciding to do this I've read that people that are super-rich that people complain don't pay many taxes do these kinds of things. Really these options are only open for people that have a sizable investment account.

I set mine up to be interest only because I am a single person and have no need to leave money for anyone if I pass away. So if this happens to me I told my siblings to just sell my assets which they would inherit at a cost basis and just pay off the line of credit.

I'm only paying like $700 a month to live in my house! And even though there's a management fee I'm saving money by not having to get home insurance which is getting ridiculously expensive in Florida. I know the risks I'm running but it's what I'm doing for now. I can change my mind later. I can get a mortgage and keep the line of credit open!

I had asked him earlier that I had some FI friends that would like this and he said it was fine for people to contact him. PM me if you want the contact information.
« Last Edit: September 28, 2021, 07:42:48 PM by Daisy »

boarder42

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #27 on: September 29, 2021, 06:49:49 AM »
I am not trying to optimize for ACA, but I did run into a problem with trying to get a mortgage while FIREd. Some lenders do look at assets, but in general they want to see some consistency for 3 years or so. Since I didn't have this amount of time since FIREd, I decided to go the Investment Line of Credit with my local bank instead. Kind of like a margin loan, but not exactly. I can borrow up to 70% of what I have invested with them. I still had some assets in managed non-Vanguard account (before I learned about index investing), so I transferred those assets there.

The closing was really easy as I ended up paying "cash" for the house. The investment account is the collateral I have for the loan. The bank is managing those assets so they know it is not in "risky" (their view) investments.

It is a lot more flexible, they don't care about home inspections or insurance, so buying a house was really easy. Downside is that it is based on the Fed's prime rate, which can change...although I don't see that happening any time soon.

I can also use this line of credit for anything I want.

I may revisit the mortgage question in a couple of years when I have more FIRE economic history to show.

Out of curiosity, what kind of rate did you get for that? I assume it's your rate + prime overall...

Prime rate - 0.5% (they take this off if investements are with them)
3.25 - 0.5
2.75%

70% on a line of credit is interesting. Is that based on a count value at time of credit?  What makes them call it?  I can get 50% margin out of ibkr. But 70% may get me thru the 5 year bridge never tapping Roth.

70% of whatever the balance is. Obviously you leave yourself some room in case of a market correction. It's with a local bank that does personal type banking so they won't do an automatic Margin Call if your balance goes much lower or they will ask you to transfer more investments in or pay some of the line of credit down. They charge around a 1% management fee. Like I said it was already money I had managed elsewhere. I still have a big chunk in Vanguard.

It's actually a  form of tax-free income if your portfolio keeps growing. After deciding to do this I've read that people that are super-rich that people complain don't pay many taxes do these kinds of things. Really these options are only open for people that have a sizable investment account.

I set mine up to be interest only because I am a single person and have no need to leave money for anyone if I pass away. So if this happens to me I told my siblings to just sell my assets which they would inherit at a cost basis and just pay off the line of credit.

I'm only paying like $700 a month to live in my house! And even though there's a management fee I'm saving money by not having to get home insurance which is getting ridiculously expensive in Florida. I know the risks I'm running but it's what I'm doing for now. I can change my mind later. I can get a mortgage and keep the line of credit open!

I had asked him earlier that I had some FI friends that would like this and he said it was fine for people to contact him. PM me if you want the contact information.

I'm 100% a fan of leveraging as much dept as possible - I was inquiring b/c my spending plan involves using debt instead of selling equities or cashing out roth contributions for the first few years til i hit my cap.  So if i can leverage a larger line of credit thats good.  I know my dad just got one with etrade to do a house down payment so he didnt have to buy and sell on the same day and could be non contingent - i'll have to check into their lines of credit options at some point

SwordGuy

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #28 on: September 29, 2021, 09:58:10 AM »
Agreed that this is a lender problem, not an ACA problem. Lenders don't like non-job income. This pops up on the Post-FIRE forum pretty often. If you search for SwordGuy, he has a pretty good primer on how to qualify for mortgages without a job.

Hint: it sucks.

Happened to spot this.  Info is in this thread.   If you go and read the Fannie Mae/Freddie Mac guidelines and set stuff up two bank statements before you apply for the loan it will go much easier.   I didn't know to do that and the goobers I was dealing with didn't know the rules so they couldn't tell me what I had to do, so it was a real pain for me:

https://forum.mrmoneymustache.com/real-estate-and-landlording/morgages-after-fire/

Loren Ver

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #29 on: September 29, 2021, 01:53:05 PM »
Thank you for the link @SwordGuy

DH and I are in the dreaming about building a house stage and we would really like to leverage as much as possible, but it is looking like an... interesting process.

LV

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #30 on: September 29, 2021, 02:25:32 PM »
@boarder42 let me know how it goes with E-Trade. I also have an account there and wouldn't mind leveraging a little more or at least learn what the options are.

SwordGuy

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #31 on: September 29, 2021, 04:48:40 PM »
Thank you for the link @SwordGuy

DH and I are in the dreaming about building a house stage and we would really like to leverage as much as possible, but it is looking like an... interesting process.

LV

Honestly, it was only hard on the stocks and bonds component of our income because I assumed the mortgage goobers knew how to do their job.   Up front I told them I could have any income they required of me, they just needed to tell me what it was.   They couldn't do it 'cause they didn't know how.

Once I read the rules and set up the income streams, and got a letter from a broker confirming that income stream was set up on a recurring basis, the approval happened super fast.    Clearly there was some software that they typed data into and returned a good/bad judgement call.

Had I done that BEFORE I went shopping for a house and done it early enough for two bank statements to show those deposits, I suspect that portion of the process would have been simple as can be.

The other part that was hard was the rental properties.  We were ploughing our profits back into the business with new properties, so we were technically producing a business loss.  As soon as we stopped renovating we showed a profit.   The problem was that the renovations were in the last two year's taxes.   When they commented that my properties showed I had a loss, my response was, "Of course my tax returns show a loss!  If they showed a profit I would be paying taxes!"   So it took a bit of effort to show we were now showing a profit.   That and I had to have my CPA school them on how to calculate depreciation 'cause the mortgage people did it wrong.

For a pure stock/bond asset stream and/or social security mixture, it should be easy if you've set things up a few months ahead of time.

boarder42

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #32 on: September 29, 2021, 05:33:41 PM »
@boarder42 let me know how it goes with E-Trade. I also have an account there and wouldn't mind leveraging a little more or at least learn what the options are.

65%.

And the rate is based on account size. So at 400k they said the rate was 3.75 based on today's rates but he could see how much lower he could get it. 

boarder42

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #33 on: October 01, 2021, 09:26:52 AM »
@boarder42 let me know how it goes with E-Trade. I also have an account there and wouldn't mind leveraging a little more or at least learn what the options are.

65%.

And the rate is based on account size. So at 400k they said the rate was 3.75 based on today's rates but he could see how much lower he could get it.

I followed by talking with them. They can get me 1.5% over sofr. I can borrow up to 65% and have to maintain an invested account size up to 70%. I ran some worst case calcs in my journal. And I think we're unlikely to ever have to sell a share of stock. Worst case we end up moving a few grand from Roth cont to taxable.

Loren Ver

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #34 on: October 02, 2021, 10:02:51 AM »
Thank you for the link @SwordGuy

DH and I are in the dreaming about building a house stage and we would really like to leverage as much as possible, but it is looking like an... interesting process.

LV

Honestly, it was only hard on the stocks and bonds component of our income because I assumed the mortgage goobers knew how to do their job.   Up front I told them I could have any income they required of me, they just needed to tell me what it was.   They couldn't do it 'cause they didn't know how.

Once I read the rules and set up the income streams, and got a letter from a broker confirming that income stream was set up on a recurring basis, the approval happened super fast.    Clearly there was some software that they typed data into and returned a good/bad judgement call.

Had I done that BEFORE I went shopping for a house and done it early enough for two bank statements to show those deposits, I suspect that portion of the process would have been simple as can be.

The other part that was hard was the rental properties.  We were ploughing our profits back into the business with new properties, so we were technically producing a business loss.  As soon as we stopped renovating we showed a profit.   The problem was that the renovations were in the last two year's taxes.   When they commented that my properties showed I had a loss, my response was, "Of course my tax returns show a loss!  If they showed a profit I would be paying taxes!"   So it took a bit of effort to show we were now showing a profit.   That and I had to have my CPA school them on how to calculate depreciation 'cause the mortgage people did it wrong.

For a pure stock/bond asset stream and/or social security mixture, it should be easy if you've set things up a few months ahead of time.

Generating a few months of income shouldn't be too hard, once we figure out what we want to do.  We are still years out (we want to build and it will be ridiculously custom) and thought we might have to have multiple years of higher income in the form of tax returns.  I was not looking forward to eating a bunch of losses just to check boxes on a place we could pay for out of pocket because mortgage companies struggle with the maths.

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Re: Hidden consequences of manufacturing low income for ACA subsidy?
« Reply #35 on: October 02, 2021, 10:37:24 AM »
I wouldn't assume its going to be as easy as generating a couple months of an income stream. If you want a mortgage and the best rate you will have to show two years of tax returns and a steady income stream, at least that was my experience; they scrutinized all my financial documents right up to closing.

Sounds like a loan against a large portfolio is easier but the rate  will be higher.

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