Author Topic: Qualifying for mortgage post-fire?  (Read 2145 times)

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Qualifying for mortgage post-fire?
« on: June 22, 2020, 02:16:35 PM »
My financial and life situation is shifting A LOT this year. Ive been self-employed, part-time for years, raising teens, so fairly low income on my own. Getting divorced, selling our home, but also, due to a very-likely inheritance (Family member passed away, just dont have everything sorted yet) newly/mostly fire. Will probably want to purchase another home in the next 2 years, once everything is sorted out, but given its in coastal CA, Id rather have a small mortgage than tie up almost half my nest egg in real estate. Ill still be low-key earning, maybe $20-$25k / year on a schedule C, but not enough to qualify for, say, a $300k mortgage under income rules (on, say, an $850k house). Would a bank lend money based on retirement funds, dividends and capital gains? Will I need to take larger gains next year (and thus pay more taxes) if I want to qualify? Ill likely also eventually take on a roommate, so perhaps I pay cash but then get a HELOC after that added income shows up on tax return? This is all pretty hazy and in the future, but Im curious...

Mr. Green

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Re: Qualifying for mortgage post-fire?
« Reply #1 on: June 22, 2020, 03:05:34 PM »
I just went through this two months ago. Unless you are 62 or older Federal loan programs that banks use will not use retirement funds to qualify you. They would take our total liquid assets, cut it by 30%, then use that total divided by 240 (20 years) to determine a "monthly income" based on asset drawdown. Then only 50% of that income can be used for a mortgage and that's assuming you have virtually no other debts.

If you have two documented (tax returns) years of 1099 or Schedule C income that will also help you. Hopefully the combination of the two will get you over the bar for lending!
« Last Edit: June 22, 2020, 03:07:20 PM by Mr. Green »

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Re: Qualifying for mortgage post-fire?
« Reply #2 on: June 23, 2020, 09:23:22 AM »
Thanks! Thats very helpful information!

bacchi

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Re: Qualifying for mortgage post-fire?
« Reply #3 on: June 23, 2020, 11:43:38 AM »
I just went through this two months ago. Unless you are 62 or older Federal loan programs that banks use will not use retirement funds to qualify you. They would take our total liquid assets,

Will they consider your 'seasoned' Roth contributions as part of your liquid assets? Or is it just cash and brokerage accounts?

Mr. Green

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Re: Qualifying for mortgage post-fire?
« Reply #4 on: June 23, 2020, 04:27:49 PM »
I just went through this two months ago. Unless you are 62 or older Federal loan programs that banks use will not use retirement funds to qualify you. They would take our total liquid assets,

Will they consider your 'seasoned' Roth contributions as part of your liquid assets? Or is it just cash and brokerage accounts?
IRAs of all kinds are out. I even pointed them to the IRS tax code language that shows the Roth rollover as a legitimate way to access funds annually and it didn't make a difference.

Missy B

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Re: Qualifying for mortgage post-fire?
« Reply #5 on: June 23, 2020, 11:34:24 PM »
I just went through this two months ago. Unless you are 62 or older Federal loan programs that banks use will not use retirement funds to qualify you. They would take our total liquid assets, cut it by 30%, then use that total divided by 240 (20 years) to determine a "monthly income" based on asset drawdown. Then only 50% of that income can be used for a mortgage and that's assuming you have virtually no other debts.


So the banks base their loans on the worst case scenario that
1) the applicant will suffer a 30% never to be recovered loss on their portfolio
2) that there will never be any portfolio growth ever in 20 years

That`s pretty conservative. I`d wager if  said scenario occurs, said applicant will be about the only mortgage holder in the bank's portfolio who is actually making payments.

Mr. Green

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Re: Qualifying for mortgage post-fire?
« Reply #6 on: June 24, 2020, 06:43:10 AM »
I just went through this two months ago. Unless you are 62 or older Federal loan programs that banks use will not use retirement funds to qualify you. They would take our total liquid assets, cut it by 30%, then use that total divided by 240 (20 years) to determine a "monthly income" based on asset drawdown. Then only 50% of that income can be used for a mortgage and that's assuming you have virtually no other debts.


So the banks base their loans on the worst case scenario that
1) the applicant will suffer a 30% never to be recovered loss on their portfolio
2) that there will never be any portfolio growth ever in 20 years

That`s pretty conservative. I`d wager if  said scenario occurs, said applicant will be about the only mortgage holder in the bank's portfolio who is actually making payments.
It's incredibly dumb. The notion that my seven-figure portfolio is more vulnerable to default than someone losing their job is laughable. But I don't make the rules, and when you buck the system sometimes you get left out of things. Maybe the rules will loosen up again once we're past this pandemic.

Dicey

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Re: Qualifying for mortgage post-fire?
« Reply #7 on: June 24, 2020, 06:44:16 AM »
I just went through this two months ago. Unless you are 62 or older Federal loan programs that banks use will not use retirement funds to qualify you. They would take our total liquid assets, cut it by 30%, then use that total divided by 240 (20 years) to determine a "monthly income" based on asset drawdown. Then only 50% of that income can be used for a mortgage and that's assuming you have virtually no other debts.


So the banks base their loans on the worst case scenario that
1) the applicant will suffer a 30% never to be recovered loss on their portfolio
2) that there will never be any portfolio growth ever in 20 years

That`s pretty conservative. I`d wager if  said scenario occurs, said applicant will be about the only mortgage holder in the bank's portfolio who is actually making payments.
It's incredibly dumb. The notion that my seven-figure portfolio is more vulnerable to default than someone losing their job is laughable. But I don't make the rules, and when you buck the system sometimes you get left out of things. Maybe the rules will loosen up again once we're past this pandemic.
Hope so.

Monkey Uncle

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Re: Qualifying for mortgage post-fire?
« Reply #8 on: June 24, 2020, 07:05:27 AM »
You might want to check into whether your brokerage firm offers a pledged asset line of credit.  I've never used one myself, but the one my broker offers sounds like it might be a decent option.  Right now the rate on a $300k loan is LIBOR plus 3.25, which would put you at about 3.85%.

Metta

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Re: Qualifying for mortgage post-fire?
« Reply #9 on: June 24, 2020, 07:23:52 AM »
I just went through this two months ago. Unless you are 62 or older Federal loan programs that banks use will not use retirement funds to qualify you. They would take our total liquid assets, cut it by 30%, then use that total divided by 240 (20 years) to determine a "monthly income" based on asset drawdown. Then only 50% of that income can be used for a mortgage and that's assuming you have virtually no other debts.

If you have two documented (tax returns) years of 1099 or Schedule C income that will also help you. Hopefully the combination of the two will get you over the bar for lending!

This is really helpful! Weve been looking at buying a house in about a year or two when my husband leaves his university and using a mortgage to get around the tax hit of suddenly adding a bunch of money to our income for one year. It sounds like the best plan is to take a mortgage out a year before he leaves and then manage our withdrawals carefully to pay the mortgage off more quickly when we leave.

Dicey

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Re: Qualifying for mortgage post-fire?
« Reply #10 on: June 24, 2020, 10:22:35 AM »
I just went through this two months ago. Unless you are 62 or older Federal loan programs that banks use will not use retirement funds to qualify you. They would take our total liquid assets, cut it by 30%, then use that total divided by 240 (20 years) to determine a "monthly income" based on asset drawdown. Then only 50% of that income can be used for a mortgage and that's assuming you have virtually no other debts.

If you have two documented (tax returns) years of 1099 or Schedule C income that will also help you. Hopefully the combination of the two will get you over the bar for lending!

This is really helpful! Weve been looking at buying a house in about a year or two when my husband leaves his university and using a mortgage to get around the tax hit of suddenly adding a bunch of money to our income for one year. It sounds like the best plan is to take a mortgage out a year before he leaves and then manage our withdrawals carefully to pay the mortgage off more quickly when we leave.
Or, consider that you are unlikely to get such cheap money ever again and let it ride, serene and secure in the knowledge that you could pay it off whenever you wanted. Invest the money instead and let those soldiers keep doing some heavy lifting on your behalf.

SpareChange

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Re: Qualifying for mortgage post-fire?
« Reply #11 on: June 24, 2020, 11:58:38 AM »
I just went through this two months ago. Unless you are 62 or older Federal loan programs that banks use will not use retirement funds to qualify you. They would take our total liquid assets, cut it by 30%, then use that total divided by 240 (20 years) to determine a "monthly income" based on asset drawdown. Then only 50% of that income can be used for a mortgage and that's assuming you have virtually no other debts.

If you have two documented (tax returns) years of 1099 or Schedule C income that will also help you. Hopefully the combination of the two will get you over the bar for lending!

I was recently trying to find info on this. At least one article suggested the rule was to divide by 360, so even worse. Ugh. IT's a good thing I like my apartment lol.

 https://blog.massmutual.com/post/how-to-get-a-mortgage-during-retirement

Mr. Green

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Re: Qualifying for mortgage post-fire?
« Reply #12 on: June 24, 2020, 12:57:29 PM »
I just went through this two months ago. Unless you are 62 or older Federal loan programs that banks use will not use retirement funds to qualify you. They would take our total liquid assets, cut it by 30%, then use that total divided by 240 (20 years) to determine a "monthly income" based on asset drawdown. Then only 50% of that income can be used for a mortgage and that's assuming you have virtually no other debts.

If you have two documented (tax returns) years of 1099 or Schedule C income that will also help you. Hopefully the combination of the two will get you over the bar for lending!

This is really helpful! Weve been looking at buying a house in about a year or two when my husband leaves his university and using a mortgage to get around the tax hit of suddenly adding a bunch of money to our income for one year. It sounds like the best plan is to take a mortgage out a year before he leaves and then manage our withdrawals carefully to pay the mortgage off more quickly when we leave.
The irony is that you only have to have that income until the day you close on the loan. You could quit your jobs the next day and the banks don't care. That's what makes it so frustrating to us.

Though this new knowledge has helped us realize that we need to keep the house we own as a rental. On paper, it doesn't meet good metrics for rental income but at this point the rent pays for all the expenses and we couldn't buy another house with a mortgage so it's better to hang on to it and ensure we have a place we know we can return to, even if we have no current plans to do so. The pandemic has taught us that much.

Mr. Green

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Re: Qualifying for mortgage post-fire?
« Reply #13 on: June 24, 2020, 01:04:57 PM »
I just went through this two months ago. Unless you are 62 or older Federal loan programs that banks use will not use retirement funds to qualify you. They would take our total liquid assets, cut it by 30%, then use that total divided by 240 (20 years) to determine a "monthly income" based on asset drawdown. Then only 50% of that income can be used for a mortgage and that's assuming you have virtually no other debts.

If you have two documented (tax returns) years of 1099 or Schedule C income that will also help you. Hopefully the combination of the two will get you over the bar for lending!

This is really helpful! Weve been looking at buying a house in about a year or two when my husband leaves his university and using a mortgage to get around the tax hit of suddenly adding a bunch of money to our income for one year. It sounds like the best plan is to take a mortgage out a year before he leaves and then manage our withdrawals carefully to pay the mortgage off more quickly when we leave.
Or, consider that you are unlikely to get such cheap money ever again and let it ride, serene and secure in the knowledge that you could pay it off whenever you wanted. Invest the money instead and let those soldiers keep doing some heavy lifting on your behalf.
This was the big reason we were pursuing a place. Rates are so unbelievably low right now that I didn't want to pass up the opportunity to secure a future residence at 3% and we're the picture perfect profile. Credit scores over 800, huge stash, no debt. Just no "income" either, or at least what they'll count as income.

Though it's ironic that rates were basically this good 7 years ago when we refinanced our townhouse (before we moved out) to 2.875% over 15 years, so who is to say that 7 years from now rates won't still be sitting around 3%. I don't think the 30 year was this low though 7 years ago. I think it was still around 3.75%. Still, borrowing a couple hundred grand for less than 4% for 30 years seems like a steal!

Dicey

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Re: Qualifying for mortgage post-fire?
« Reply #14 on: June 24, 2020, 01:18:06 PM »
Totally agree. It's nice you have that option.

It's in the news lately that people in SF are simply walking away from their leases. Supposedly one in thirteen rental units have been vacated. (Insert huge dose of skepticism here.) If jobs don't recover, it will happen with houses next.

Perhaps the fallout from that will teach lenders the value of considering assets over income. They always say: "But you could spend all that money whenever you want." This makes me laugh. Do they think we got this pile of assets by spending money on shiny shit whenever we want? Hell no! IMO, that money's far more secure than a paycheck. Might be different if the money's "new" such as with a big inheritance or a lottery win, but that doesn't apply to most people, does it?

DH still works. Every damn time we apply for a mortgage, there are not enough lines for assets. Inevitably, the lender looks at the form and says, "That's enough." It confounds me every time. Oh, and there are always more lines for debts than assets. More mortgage hilarity.

Mr. Green

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Re: Qualifying for mortgage post-fire?
« Reply #15 on: June 24, 2020, 05:21:41 PM »
Totally agree. It's nice you have that option.

It's in the news lately that people in SF are simply walking away from their leases. Supposedly one in thirteen rental units have been vacated. (Insert huge dose of skepticism here.) If jobs don't recover, it will happen with houses next.

Perhaps the fallout from that will teach lenders the value of considering assets over income. They always say: "But you could spend all that money whenever you want." This makes me laugh. Do they think we got this pile of assets by spending money on shiny shit whenever we want? Hell no! IMO, that money's far more secure than a paycheck. Might be different if the money's "new" such as with a big inheritance or a lottery win, but that doesn't apply to most people, does it?

DH still works. Every damn time we apply for a mortgage, there are not enough lines for assets. Inevitably, the lender looks at the form and says, "That's enough." It confounds me every time. Oh, and there are always more lines for debts than assets. More mortgage hilarity.
There's a hugely interesting component at play here. In the wake of the 2008 real estate crash, institutional and private investors bought an insane amount of real estate as investment properties. I remember reading articles about how, at the time, it was causing a fundamental shift because so many homes were not being bought by families, and now siginificantly more houses were being rented.

If the rental market turns into a bloodbath after eviction protections and pandemic assistance runs out, many of these same companies that thought real estate was such a winning play may be left holding the bag because they still own many of these houses. If losses get bad enough they may have no choice but to sell, and perhaps the volume of properties hitting the market will depress prices. It's an interesting situation, but I have no idea if it will actually go bad or not.

Metta

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Re: Qualifying for mortgage post-fire?
« Reply #16 on: June 25, 2020, 09:33:33 AM »
I just went through this two months ago. Unless you are 62 or older Federal loan programs that banks use will not use retirement funds to qualify you. They would take our total liquid assets, cut it by 30%, then use that total divided by 240 (20 years) to determine a "monthly income" based on asset drawdown. Then only 50% of that income can be used for a mortgage and that's assuming you have virtually no other debts.

If you have two documented (tax returns) years of 1099 or Schedule C income that will also help you. Hopefully the combination of the two will get you over the bar for lending!

This is really helpful! Weve been looking at buying a house in about a year or two when my husband leaves his university and using a mortgage to get around the tax hit of suddenly adding a bunch of money to our income for one year. It sounds like the best plan is to take a mortgage out a year before he leaves and then manage our withdrawals carefully to pay the mortgage off more quickly when we leave.
Or, consider that you are unlikely to get such cheap money ever again and let it ride, serene and secure in the knowledge that you could pay it off whenever you wanted. Invest the money instead and let those soldiers keep doing some heavy lifting on your behalf.

That is certainly a possibility. Though having a house free and clear has been such a delight emotionally we are both reluctant to take on debt again.

Dicey

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Re: Qualifying for mortgage post-fire?
« Reply #17 on: June 25, 2020, 09:53:17 AM »
I just went through this two months ago. Unless you are 62 or older Federal loan programs that banks use will not use retirement funds to qualify you. They would take our total liquid assets, cut it by 30%, then use that total divided by 240 (20 years) to determine a "monthly income" based on asset drawdown. Then only 50% of that income can be used for a mortgage and that's assuming you have virtually no other debts.

If you have two documented (tax returns) years of 1099 or Schedule C income that will also help you. Hopefully the combination of the two will get you over the bar for lending!

This is really helpful! Weve been looking at buying a house in about a year or two when my husband leaves his university and using a mortgage to get around the tax hit of suddenly adding a bunch of money to our income for one year. It sounds like the best plan is to take a mortgage out a year before he leaves and then manage our withdrawals carefully to pay the mortgage off more quickly when we leave.
Or, consider that you are unlikely to get such cheap money ever again and let it ride, serene and secure in the knowledge that you could pay it off whenever you wanted. Invest the money instead and let those soldiers keep doing some heavy lifting on your behalf.

That is certainly a possibility. Though having a house free and clear has been such a delight emotionally we are both reluctant to take on debt again.
I totally understand this. The whole DPOYM thing is counter-intuitive. We never heard about this from our parents and grandparents. During the Great Depression, mortgage loans were callable and people lost their homes, even if they were current on their payments. That has not been true for over fifty years, but still we hear stories. I'll bet a lot of people now don't even know what that term means, but they still think killing the mortgage asap is the best option.

As to "emotional delight" one could say that it's in part because you're not comparing it to what the additional funds might have done if invested instead. I'm not saying you're wrong, by any means, just that you may not be comparing that feeling to anything else. I am constantly "emotionally delighted" when I see my investment account balances. Two commas! I cannot believe my money earns more than I ever did. Amazing!

And OMG - FOMO!!! When DH and I got married, we sold two highly appreciated homes [for reasons] and bought  one together, paying cash. We see these crazy low mortgage rates now and still think we should get one. If B42 was still around, we probably would have done it already.

My point is no answer is 100% correct. Learn the math, do the math, then decide. As always, we're talking about an affordable house, fixed-rate, tax deductible mortgage, yada yada yada...

SpareChange

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Re: Qualifying for mortgage post-fire?
« Reply #18 on: June 26, 2020, 09:02:34 AM »
I just went through this two months ago. Unless you are 62 or older Federal loan programs that banks use will not use retirement funds to qualify you. They would take our total liquid assets, cut it by 30%, then use that total divided by 240 (20 years) to determine a "monthly income" based on asset drawdown. Then only 50% of that income can be used for a mortgage and that's assuming you have virtually no other debts.

If you have two documented (tax returns) years of 1099 or Schedule C income that will also help you. Hopefully the combination of the two will get you over the bar for lending!

Mr Green, did they want a larger down payment as well for this type of mortgage?

Mr. Green

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Re: Qualifying for mortgage post-fire?
« Reply #19 on: June 26, 2020, 10:14:12 PM »
I just went through this two months ago. Unless you are 62 or older Federal loan programs that banks use will not use retirement funds to qualify you. They would take our total liquid assets, cut it by 30%, then use that total divided by 240 (20 years) to determine a "monthly income" based on asset drawdown. Then only 50% of that income can be used for a mortgage and that's assuming you have virtually no other debts.

If you have two documented (tax returns) years of 1099 or Schedule C income that will also help you. Hopefully the combination of the two will get you over the bar for lending!

Mr Green, did they want a larger down payment as well for this type of mortgage?
No. This was qualification for a conventional mortgage. In our case we wanted to buy a 200k house. We planned to put 20% down so the loan would have been 160k. The total payment, including taxes and insurance, was about $900 a month. So by their formula we had to have $1,800 a month in "income." At the time our after-tax accounts were worth about 440k, so we'd have had 400k after the down payment for them to consider for asset drawdown. Take 30% off the top and then divide by 240 and it comes to $1,166. In order to get the monthly payment under their threshold we would have had to make the down payment so large that they probably wouldn't make a loan that small. Plus it defeated the whole purpose of keeping our money invested by taking advantage of the current low rates.