Author Topic: Morgages after FIRE?  (Read 1283 times)

Frankies Girl

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Morgages after FIRE?
« on: September 08, 2020, 03:26:30 PM »
So FIREd for going on 6 years, no income other than generated in the non-conventional investments category. My tax return makes me look so sad and poor. :D

Of course this means that most regular mortgages are not going to fly with my situation.

Found my nearly-dream home (honestly shocked as I've been randomly looking off and on for like a decade) and it's like 90% dream, and the 10% is something that can be done up over the next decade or so if I still want it (no take something out to put a more suitable version I want situation). My current house is in a super hot area and my specific house layout is snapped up in days at full asking price - and asking price is at minimum 50% of cost (not counting realtor fees but still nearly) of nearly-dreamhouse.

So I want a mortgage for about 50% ish of the cost if we do end up really wanting this nearly-dreamhouse.

I have come across a few articles that discussed ADU - asset depletion underwriting or asset amortization underwriting. It still seems odd and that they may not be easy to come by since most mortgage underwriters don't appear to want to do more than the basics and this would require a few extra steps?

I don't want to do silly monthly pulls to fake a regular income both because it's stupid and inefficient and also I'm on ACA and I get sweet subsidies which absolutely would disappear if I pulled enough to hit the level to be approved.

And despite my portfolio not only being more than adequate to cover outright purchase of nearly-dreamhouse, I may be confused on the math involved because I do the whole 70% thing and divide by 360 thing and then compare that with the cost of the monthly payment and come up with it being 32% of my "income" if I escrow property taxes/insurance - but I also would not be escrowing because I'm capable of paying a big ol bill or 3 when they actually are due and not letting the mortgage company hold my money for me. So I'm maybe confused if I can even (on paper) afford the nearly-dreamhouse?

Lenders? Who should I be looking at? Any advice, info, or tips/tricks?

SwordGuy

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Re: Morgages after FIRE?
« Reply #1 on: September 08, 2020, 03:54:38 PM »
I went thru this last January.   It was a real hassle because the mortgage people DIDN'T KNOW HOW TO DO IT.   I had to look it up on the Freddie Mac and Fannie Mae websites to learn the rules.   Once I did that we were able to move forward again.   I had to pick the strictest of both because that lets the underwriters sell the loan to either.

I don't remember the exact parameters that asset-based mortgages work on but I remember the general guidelines I found.   That will help you double-check the current rules (which might have changed a bit since then).

Stock portfolios only counted at 70% of value.  So, a $1,000,000 portfolio only counted as $700,000.   Any amount you take out of that has to be supportable for 3 years, i.e., 36 payments.   So, divide $700,000 by 36 and that's your maximum income from that source.

If you don't think that makes a lot of sense for a 30 year mortgage, hey, I don't make the rules.

Now, here's the rub.   If you have a bevy of accounts your portfolio is stashed away in, each of them has to be computed separately.    So, $100,000 in Vanguard supports $70,000 / 36 in income.   Need more?   You can't take it out of that Vanguard account and use it up.  You have to take it out of a different account, say your Fidelity account.  (Note I said "account", not "fund".)

You have to set up a recurring income stream from those accounts.   If you want your life to be easier, set up the recurring withdrawals before you go house shopping so they all show up as regular income in your checking account statements for the prior two months.    I didn't do that so I had to get a letter from the company the account was in that stated I had set up such a withdrawal.   Doesn't have to be monthly, it could be quarterly or even annually.   In my case, it was semi-annual.

Of course, all that deals with calculating your asset-based income.   The mortgage underwriters then compare your total income with your debts and payments and approve or not.

Once I understood the rules, I was able to confirm that a given approximate income given my debt would be acceptable.   

Of course, other income sources like pensions, social security, rental property income, etc., also count, but they have their own rules.   In my case, I had rental income, sharecropped farm income, social security and asset-based components.    It was a bitch because I had to document everything.

Hope that helps, and double-check the exact numbers.

Aegishjalmur

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Re: Morgages after FIRE?
« Reply #2 on: September 08, 2020, 04:35:56 PM »
It's often called asset dissipation or asset depletion and you can get a conventional mortgage with this income (As SwordGuy mentioned it is a pain, so be aware may be a longer mortgage approval process).

Also, make sure your Mortgage sales person has the income type filled in correctly on the Loan application (URAR/1003 form)or the process will get even more confusing. This type of income usually has to be approved by a higher level UW, so if the 1003 is incorrect, you may get bounced between multiple UW's which will waste more time.


Here are the Fannie Mae Guidelines (search for Employment-Related Assets as Qualifying Income to get to specific section):
https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-3-Income-Assessment/Section-B3-3-1-Employment-and-Other-Sources-of-Income/1035647451/B3-3-1-09-Other-Sources-of-Income-10-02-2019.htm#Employment-Related.20Assets.20as.20Qualifying.20Income

Here are the Freddie Mac Guidelines (search for Retirement account distributions as income to get to the specific section):
https://guide.freddiemac.com/app/guide/content/a_id/1000659
« Last Edit: September 08, 2020, 04:46:41 PM by Aegishjalmur »

SwordGuy

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Re: Morgages after FIRE?
« Reply #3 on: September 08, 2020, 04:55:51 PM »
We were able to make our closing date of 30 days (pre-covid delays), but ONLY because I treated pushing the mortgage company to do their job as my primary job for that month.

Had we set up the income streams 2 statements ahead of time to support our budgeted purchase price, then things would have gone much smoother.

GreenEggs

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Re: Morgages after FIRE?
« Reply #4 on: September 08, 2020, 06:32:15 PM »
Glad you guys explained all this.  I hate having so much equity sunk into real estate that could put to better use. 

bacchi

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Re: Morgages after FIRE?
« Reply #5 on: September 08, 2020, 08:10:10 PM »
Now, here's the rub.   If you have a bevy of accounts your portfolio is stashed away in, each of them has to be computed separately.    So, $100,000 in Vanguard supports $70,000 / 36 in income.   Need more?   You can't take it out of that Vanguard account and use it up.  You have to take it out of a different account, say your Fidelity account.  (Note I said "account", not "fund".)

So...if I'm currently pulling out of my Roth for ALL of my money, but the 401k still contains $500k that I'm slowly converting, I have to adjust my withdrawals and start withdrawing $9700 ($500k*.7/36) from my 401k and take the tax hit?

Frankies Girl

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Re: Morgages after FIRE?
« Reply #6 on: September 08, 2020, 08:51:27 PM »
I went thru this last January.   It was a real hassle because the mortgage people DIDN'T KNOW HOW TO DO IT.   I had to look it up on the Freddie Mac and Fannie Mae websites to learn the rules.   Once I did that we were able to move forward again.   I had to pick the strictest of both because that lets the underwriters sell the loan to either.

I don't remember the exact parameters that asset-based mortgages work on but I remember the general guidelines I found.   That will help you double-check the current rules (which might have changed a bit since then).

Stock portfolios only counted at 70% of value.  So, a $1,000,000 portfolio only counted as $700,000.   Any amount you take out of that has to be supportable for 3 years, i.e., 36 payments.   So, divide $700,000 by 36 and that's your maximum income from that source.

If you don't think that makes a lot of sense for a 30 year mortgage, hey, I don't make the rules.

Now, here's the rub.   If you have a bevy of accounts your portfolio is stashed away in, each of them has to be computed separately.    So, $100,000 in Vanguard supports $70,000 / 36 in income.   Need more?   You can't take it out of that Vanguard account and use it up.  You have to take it out of a different account, say your Fidelity account.  (Note I said "account", not "fund".)

You have to set up a recurring income stream from those accounts.   If you want your life to be easier, set up the recurring withdrawals before you go house shopping so they all show up as regular income in your checking account statements for the prior two months.    I didn't do that so I had to get a letter from the company the account was in that stated I had set up such a withdrawal.   Doesn't have to be monthly, it could be quarterly or even annually.   In my case, it was semi-annual.

Of course, all that deals with calculating your asset-based income.   The mortgage underwriters then compare your total income with your debts and payments and approve or not.

Once I understood the rules, I was able to confirm that a given approximate income given my debt would be acceptable.   

Of course, other income sources like pensions, social security, rental property income, etc., also count, but they have their own rules.   In my case, I had rental income, sharecropped farm income, social security and asset-based components.    It was a bitch because I had to document everything.

Hope that helps, and double-check the exact numbers.

@SwordGuy

This is both helpful and confusing  -  that's on me not you tho ;)

So to give a concrete example:

Debts: one current mortgage around $30-something thousand. That's it other than monthly living expenses. Both spouse and myself have credit scores that are just points away from perfect (I have no idea how they award the unattainable 850, but I figure being less than 20 points from that means we're probably a safe bet). Again, current house will net us (after all the costs of selling it + paying off existing mortgage  at minimum $125K.

Say dreamhouse is $300K.

I have a downpayment of $100K (so a third instead of a half as I really would love to get most of this in a mortgage if possible because the less I have to pull from my accounts, the happier I'll be).

Closing costs, moving expenses and all that junk would be paid out of cash reserves (whatever extra is left from current house sale).

So would hope to get a $200K 30 year mortgage. Mortgage including escrow for taxes and insurance and whatever else: $1,500/month. 

I have a single taxable account that has say $700K in it (I have lots of accounts actually, but that's the easy one to point to and say "this has gobs of accessible money"). Using the maths means 70% of that is = $480K (rounding down for fun). That 480 divided by 36 months/3 years = an income of $13K/month or ~$150K/year.

Based on my potential to turn that taxable account into $150K a year using that formula, it looks like I should be easily (ha) be approved for a loan using ADU? I know I'm grossly oversimplifying this but the main thing would be I need to show them the last couple of statements of that taxable account and them work up the loan based on that?

I do NOT want to manufacture withdraws from this account. Again, stupid AF to have to sell off funds I don't actually need and it will totally screw up my ACA subsidy. If I have to do that, it's going to be a case of screw this whole dreamhouse thing since I definitely don't think it will still be on the market for 2 months to get statements to do that crap.

But if I'm reading your post correctly... I could just set up a semi annual sell/withdraw that would equal the amount in periodic payment format? So like go set that account to sell off twice a year $75K and then deposit in my checking account? And get a letter from my financial house stating this in in force.. and maybe after closing on the property I could cancel that sell/withdraw order? Not totally dishonest but if you gotta jump through a hoop or two to get to the destination I'm down with that. 

I guess I should call a few lenders. I do have a plethora of credit unions nearby so may start there, and also check with the evil empire I currently have my mortgage with just for giggles. But it is seemingly a long way round for someone that has excellent credit, practically zero debt and a mound of money to use as collateral. You'd think the lenders would LOVE this type of situation as there's less likelihood of defaulting with someone like that than any joeschmoe that might be laid off next month and unable to pay the following month's payments.

ETA: and I just realized I have to sell the current house first or else the whole using the equity as the downpayment thing won't work so I would need to get my rear in gear if I really really want this to work. Crap. But at least I know more about the process now and can figure out what needs to be done to get this house sold and whether I'm truly ready to jump ship as it were. I was telling the husband that there's also a fear of the unknown now - sure this house has been an endless comedy of things that need fixing but we KNOW all the crap that is wrong with it and how much we've already taken care of... dreamhouse could be a nightmare in all honesty. It's just a dumb house, and I probably won't even like it once I'm in it. :(
« Last Edit: September 08, 2020, 09:07:10 PM by Frankies Girl »

SwordGuy

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Re: Morgages after FIRE?
« Reply #7 on: September 08, 2020, 10:25:33 PM »
@SwordGuy

So to give a concrete example:

Debts: one current mortgage around $30-something thousand. That's it other than monthly living expenses. Both spouse and myself have credit scores that are just points away from perfect (I have no idea how they award the unattainable 850, but I figure being less than 20 points from that means we're probably a safe bet). Again, current house will net us (after all the costs of selling it + paying off existing mortgage  at minimum $125K.
Very relevant to anyone thinking this thru in a logical manner.

Totally irrelevant to whether they will give you a mortgage using Freddie Mac/Fannie Mae guidelines.   

You have an existing mortgage payment now and that impacts the debt to income ratio that they will check.   I don't know what the exact ratio is that they are looking for, sorry.   Same as for any other mortgage.

If you've already sold the house when you apply for the mortgage, of course, that's different.  Then you don't have the monthly debt payment so that's better.   

Say dreamhouse is $300K.

I have a downpayment of $100K (so a third instead of a half as I really would love to get most of this in a mortgage if possible because the less I have to pull from my accounts, the happier I'll be).

So would hope to get a $200K 30 year mortgage. Mortgage including escrow for taxes and insurance and whatever else: $1,500/month. 

So, the new mortgage would be circa $200k.    That will have a payment that will be included in your monthly debt payments, which will impact your income to debt ratio.   Same as for any other mortgage.

Closing costs, moving expenses and all that junk would be paid out of cash reserves (whatever extra is left from current house sale).

You will need to establish where that money came from OR that it's been available to you for 2 statements.   They want to know you aren't borrowing it from anyone else.   Same as with any other mortgage. 

I have a single taxable account that has say $700K in it (I have lots of accounts actually, but that's the easy one to point to and say "this has gobs of accessible money"). Using the maths means 70% of that is = $480K (rounding down for fun). That 480 divided by 36 months/3 years = an income of $13K/month or ~$150K/year.

Based on my potential to turn that taxable account into $150K a year using that formula, it looks like I should be easily (ha) be approved for a loan using ADU? I know I'm grossly oversimplifying this but the main thing would be I need to show them the last couple of statements of that taxable account and them work up the loan based on that?

No.   Potential withdrawals don't matter.  Only ACTUAL and RECURRING withdrawals count.    If you say to yourself, "That makes no sense, obviously I've got the money and I could withdraw it at any time, so that can't be right!", you would be correct it makes no sense and wrong that it can't be right.  :)

Let's say your monthly debt with the new mortgage included would be $3,500.

Let's say the bank wants a max income to debt ratio of 35%. 

If you had an income of $10,000 a month then up to $3,500 of that money could be "locked in" to recurring debt payments such as your old mortgage, your new mortgage, car payments, minimum credit card payments, etc.     The fact that you'll sell your old house asap DOESN'T MATTER because you owe the payments now, so they count against your monthly debt. 

So, now you've established how much income you'll need.

You have $700k in an account, so 70% would be $490k.   $490k / 36 =  supportable income for getting a mortgage up to $13,611/ month.   (Again -- CHECK the guidelines for the EXACT numbers to plug into the formula!)   

Until that money is being withdrawn AND SHOWS UP IN YOUR BANK STATEMENTS it doesn't count.    So, in order to get the loan, you would either have to start withdrawing the money BEFORE you applied so the money ALREADY showed up on statements you can hand to the bank; or you'll have to delay closing until you start the withdrawals and at least one statement shows that income and you'll need to prove it's a recurring withdrawal.

In our case, this is how I did it.   We started the mortgage process mid-December.  Totally unplanned because we hadn't even been shopping for a house, we just stumbled on one we really wanted.    One Jan 2nd I withdrew $20k from an IRA to pay off and close down a HELOC we had open on our old house.   I happened to pull it out of an IRA I had inherited from my mom and it came with a financial advisor my mom had personally introduced me to 10 years earlier.   I had been dealing with him for the prior 5 years after I inherited it.   THIS WAS PURE LUCK that I pulled the money from this account and not some other account.

That's because I didn't know about the asset-based income rule.   Planned closing was mid-January.

By the time I found out about it it would be too late to set up a recurring payment of circa $2500 per month that we would need AND have the funds hit the bank in time for a statement to be issued in time for our planned closing date.   That would mean nearly an additional month delay in closing for the statement to show a monthly withdrawal.

However, the $20,000 payment HAD been taken out in time for it to make the statement.

Here's where the luck came in.   I called the financial advisor, explained the problem I had, set up a recurring semi-annual payment of $18,000 / half year, with the next withdrawal . (I bumped it up a bit because I wanted a bit more buffer to get past the underwriters since I didn't know the actual loan to debt ratio they were looking for as they wouldn't tell me.)  I also had him write up a letter documenting the recurring payment on a semi-annual basis, describing the January money I had also received as a previously issued first payment in the series.   Because I had an actual human with a long standing relationship I was able to get him to write said letter.   Nothing in it was fraudulent but I can see how a nameless, faceless person at mega-corp would have said nope.

Had I understood this process on day one I would have set up a monthly recurring payment two months before I might start  looking for a mortgage.   Then the recurring payments would show up as routine income and the whole stress-filled extravaganza would have been much simpler.

The week after I closed I contacted the financial advisor and cancelled the recurring withdrawal.


I do NOT want to manufacture withdraws from this account. Again, stupid AF to have to sell off funds I don't actually need and it will totally screw up my ACA subsidy. If I have to do that, it's going to be a case of screw this whole dreamhouse thing since I definitely don't think it will still be on the market for 2 months to get statements to do that crap.

In our case, we didn't have recurring withdrawals already set up because we hadn't needed them.  I was starting on SS Jan 1st which would provide all but about $40 new monthly mortgage PITI for the new house.   Doesn't take a rocket scientist to figure out we could afford it but none of that mattered.   I had to get the recurring income set up.   Options might include a 45 or 60 day closing to allow two statements to cycle thru (depending on statement date timing) or getting your account holder to provide documentation about the recurring payments you've set up, and timing the closing so you'll have at least one statement showing it.   In our case, the statement came out a week before closing and that was good enough (along with the letter documenting the recurring payment schedule).

Sorry, them's the rules.


But if I'm reading your post correctly... I could just set up a semi annual sell/withdraw that would equal the amount in periodic payment format? So like go set that account to sell off twice a year $75K and then deposit in my checking account? And get a letter from my financial house stating this in in force.. and maybe after closing on the property I could cancel that sell/withdraw order? Not totally dishonest but if you gotta jump through a hoop or two to get to the destination I'm down with that. 
Your thinking cap is on and in good working order.   I would use monthly withdrawals if you can pull it off, particularly if you plan on keeping your income low.

I guess I should call a few lenders. I do have a plethora of credit unions nearby so may start there, and also check with the evil empire I currently have my mortgage with just for giggles. But it is seemingly a long way round for someone that has excellent credit, practically zero debt and a mound of money to use as collateral. You'd think the lenders would LOVE this type of situation as there's less likelihood of defaulting with someone like that than any joeschmoe that might be laid off next month and unable to pay the following month's payments.

There you go, being all rational and stuff.    You can have this same chat with my wife, she'll just LOVE LOVE LOVE to hear that same line of reasoning all over again...  :)   


ETA: and I just realized I have to sell the current house first or else the whole using the equity as the downpayment thing won't work so I would need to get my rear in gear if I really really want this to work. Crap. But at least I know more about the process now and can figure out what needs to be done to get this house sold and whether I'm truly ready to jump ship as it were. I was telling the husband that there's also a fear of the unknown now - sure this house has been an endless comedy of things that need fixing but we KNOW all the crap that is wrong with it and how much we've already taken care of... dreamhouse could be a nightmare in all honesty. It's just a dumb house, and I probably won't even like it once I'm in it. :(
Fine-tuning that thinking cap, I see. :)

As I said, you'll need to double-check the numbers with the fed's websites because I can't promise you it's 70% or 36 months, just that it's something like that.


SwordGuy

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Re: Morgages after FIRE?
« Reply #8 on: September 08, 2020, 10:27:10 PM »
Now, here's the rub.   If you have a bevy of accounts your portfolio is stashed away in, each of them has to be computed separately.    So, $100,000 in Vanguard supports $70,000 / 36 in income.   Need more?   You can't take it out of that Vanguard account and use it up.  You have to take it out of a different account, say your Fidelity account.  (Note I said "account", not "fund".)

So...if I'm currently pulling out of my Roth for ALL of my money, but the 401k still contains $500k that I'm slowly converting, I have to adjust my withdrawals and start withdrawing $9700 ($500k*.7/36) from my 401k and take the tax hit?
@bacchi ,

Sorry, but I'm not sure exactly what you're asking me.  Check my answer to Frankie's Girl above, maybe that will help.  Or give me a bit more detail.

SpareChange

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Re: Morgages after FIRE?
« Reply #9 on: September 09, 2020, 11:14:55 AM »
Mr. Green went through this earlier this year, and offered his thoughts on the process here...

https://forum.mrmoneymustache.com/post-fire/qualifying-for-mortgage-post-fire/

Rather discouraging.

bacchi

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Re: Morgages after FIRE?
« Reply #10 on: September 09, 2020, 11:15:34 AM »
Now, here's the rub.   If you have a bevy of accounts your portfolio is stashed away in, each of them has to be computed separately.    So, $100,000 in Vanguard supports $70,000 / 36 in income.   Need more?   You can't take it out of that Vanguard account and use it up.  You have to take it out of a different account, say your Fidelity account.  (Note I said "account", not "fund".)

So...if I'm currently pulling out of my Roth for ALL of my money, but the 401k still contains $500k that I'm slowly converting, I have to adjust my withdrawals and start withdrawing $9700 ($500k*.7/36) from my 401k and take the tax hit?
@bacchi ,

Sorry, but I'm not sure exactly what you're asking me.  Check my answer to Frankie's Girl above, maybe that will help.  Or give me a bit more detail.

I misunderstood one aspect but let me provide more detail too.

I have 3 accounts:
$80k taxable
$100k Roth
$500k 401k

If I want a $1500 monthly mortgage, all in, I'd need $4545 monthly income (based on 33% debt to income ratio).

From my reading, I am "allowed" to withdraw only the following per month:

taxable: $56k/36 = $1555
Roth: 70k/36 = $1944

But that's only ~$3500/month, leaving me $1045 short. I have to take that from the 401k, incurring taxes and early withdrawal penalties.



---------
I wonder...I had to get a non-conforming mortgage when I was self-employed (another frustrating process). From what the mortgage broker told me, the mortgage would become conforming after it seasoned for 2? years. Sure enough, it was sold off after payment 24. Could a non-conforming loan through an independent lender work in this situation?


Fishindude

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Re: Morgages after FIRE?
« Reply #11 on: September 09, 2020, 11:30:21 AM »
This would be a very simple loan for any intelligent banker to do, as you have the cash to cover things.
Being short on income, you will simply have to pledge some of your collateral to support the loan.

Instances like this are where it comes in handy to have a relationship with an actual human at a brick and mortar bank vs trying to do your business on line.
My little home town bank would have a deal like this put together for me in short order.

bacchi

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Re: Morgages after FIRE?
« Reply #12 on: September 09, 2020, 11:52:08 AM »
This would be a very simple loan for any intelligent banker to do, as you have the cash to cover things.
Being short on income, you will simply have to pledge some of your collateral to support the loan.

Instances like this are where it comes in handy to have a relationship with an actual human at a brick and mortar bank vs trying to do your business on line.
My little home town bank would have a deal like this put together for me in short order.

But what would the rate be and would it be fixed over 30 years?

The only reason the US has 30 year mortgages at <4% is because they're backed by the feds. No bank wants a 3.5% note on its books for 30 years.

SwordGuy

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Re: Morgages after FIRE?
« Reply #13 on: September 09, 2020, 12:22:53 PM »
@bacchi , yes, you're understanding the process.   Again, I'm not swearing that I've correctly remembered the EXACT numbers in my examples, so you'll need to double-check those. 

Frankies Girl

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Re: Morgages after FIRE?
« Reply #14 on: September 09, 2020, 03:27:36 PM »
I figured this would happen...

Problem solved - dreamhouse is under contract already.

But at least I now know what I should be looking at doing regarding ducks/rows and getting a mortgage in the near future.

thank you @SwordGuy  and everyone for helping point me in the right direction. :)

SwordGuy

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Re: Morgages after FIRE?
« Reply #15 on: September 09, 2020, 03:35:59 PM »
I figured this would happen...

Problem solved - dreamhouse is under contract already.

But at least I now know what I should be looking at doing regarding ducks/rows and getting a mortgage in the near future.

thank you @SwordGuy  and everyone for helping point me in the right direction. :)
@Frankies Girl , you're welcome.

When you look up the correct numbers, post them back here. :)

Fishindude

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Re: Morgages after FIRE?
« Reply #16 on: September 10, 2020, 07:32:46 AM »
But what would the rate be and would it be fixed over 30 years?

The only reason the US has 30 year mortgages at <4% is because they're backed by the feds. No bank wants a 3.5% note on its books for 30 years.

Those 30 years sub 4% mortgages get taken by some banks, but you are correct that most small town brick and mortar banks would not keep one, they would sell it off and service the loan.
A good banker that understands your situation will get that loan for you at a good rate if you have adequate collateral.
 

Cb1234567

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Re: Morgages after FIRE?
« Reply #17 on: September 14, 2020, 07:08:00 AM »
I figured this would happen...

Problem solved - dreamhouse is under contract already.

But at least I now know what I should be looking at doing regarding ducks/rows and getting a mortgage in the near future.

thank you @SwordGuy  and everyone for helping point me in the right direction. :)

Sometimes the universe makes the decision for us 😇.
So, after this fire drill, and I realize youíre in the camp of any tie up equity in the house when you can invest those dollars instead....have you considered just buying the house outright, and then refi to pull equity out, after the fact? Is the ACA subsidy worth it? Vs closing costs and headaches, I mean.

Am I an idiot (too rational) for thinking that a cash out loan after selling your current house would be easier than a purchase mortgage?

SwordGuy

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Re: Morgages after FIRE?
« Reply #18 on: September 14, 2020, 08:56:23 AM »

have you considered just buying the house outright, and then refi to pull equity out, after the fact? Is the ACA subsidy worth it? Vs closing costs and headaches, I mean.


I did the math.   We pulled out $100k from taxable accounts for the downpayment, so we only had to pay taxes on capital gains on that money.   Taxes will be about $7k.

After that, if we pulled another $240k from 401Ksto pay the rest of the house in cash, we would be paying 24% tax, so we would have to withdraw $315,790 to cover the taxes.  I would have cost us an extra $75,790 not to have a mortgage.

And we don't get ACA subsidies, otherwise it would cost another $15,000 on top of that.

That's pretty pricey!    So I sucked it up and treated getting that mortgage like the 1/2 time job it was in order to push them thru the process in a timely manner.

As it stands now, we only owe $58,999 on the house because we put the proceeds of the old house and a non-profit flip house onto the mortgage as they sold over the next 8 months.   We'll be below $50,000 before October when the escrow money arrives.    We've paid $5911 in interest so far this year, so we're still almost $70,000 ahead of the all cash approach.

We have one more non-profit flip to sell and we'l pay off the mortgage with the proceeds.  Or we'll cash flow it and pay it off in less than a year from now.

But damn, sometimes those underwriters nearly pushed me to just buy the house for cash.   They were awful.   Had to have my accountant school them on how to calculate depreciation on rental properties.  Had to figure out the fannie mae/freddie mac guidelines for myself.   It was maddening.

SwordGuy

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Re: Morgages after FIRE?
« Reply #19 on: September 14, 2020, 09:02:26 AM »
If I just put the escrow money on the mortgage and paid it off without extra payments, I would end up paying it off in 3 1/2 years from inception.   And I'll end up having paid about $8,200 in interest, give or take a few hundred.   Putting up with the headache was a good investment.

Frankies Girl

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Re: Morgages after FIRE?
« Reply #20 on: September 14, 2020, 09:37:53 AM »
I absolutely will not buy any house outright. In my case it would be a huge bump in wasting of money. I am a firm believer that carrying a (low interest) mortgage makes the most sense for my situation.

My MAGI is in the tax bracket where I don't pay any taxes on my dividend/cap gains. If I pulled out enough for a house, I would be paying many thousands in taxes.

In addition, I do use the ACA and get around $1,100+ a month in subsidy, and that's not counting the reductions in the silver plan/cost-sharing subsidies. For instance, based on my MAGI, I have a zero deductible (base would be in thousands range) and my max OOP is ~5K per year for the FAMILY (should be closer to 15k). My copays are $8 for any doctor visit (base is $30). And it's stellar insurance. So being mindful of my MAGI is an important factor for me.

So yeah, even more taxes/subsidy would need to be paid back and reducing the amount of money out there in the market is also not very practical for my situation either.

Getting a mortgage can be done, I just needed to have a something kickstart my thinking so I'm ready to go once I do find a reasonable property. This one was lovely, but I'm sure it's not the last lovely nearlydreamhome out there for me. And now I know what I need to do to optimize both my portfolio and satisfy the (dumb) requirements for obtaining a mortgage after FIRE. I have to say, now that the house is gone, there are things I've realized aren't super about it and I'm kind of glad I didn't go all FOMO. ;)

I think what I will plan to do over the next year is move the generated income up a tiny bit and start taking it monthly instead of lump sum 1-2 times a year, so as to simulate a more regular income. The husband has also made some rumblings about getting a fun job somewhere so it will be interesting to see about how that's going to work for us.




Dicey

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Re: Morgages after FIRE?
« Reply #21 on: September 14, 2020, 11:08:23 AM »
I figured this would happen...

Problem solved - dreamhouse is under contract already.

But at least I now know what I should be looking at doing regarding ducks/rows and getting a mortgage in the near future.

thank you @SwordGuy  and everyone for helping point me in the right direction. :)

Sometimes the universe makes the decision for us 😇.
So, after this fire drill, and I realize youíre in the camp of any tie up equity in the house when you can invest those dollars instead....have you considered just buying the house outright, and then refi to pull equity out, after the fact? Is the ACA subsidy worth it? Vs closing costs and headaches, I mean.

Am I an idiot (too rational) for thinking that a cash out loan after selling your current house would be easier than a purchase mortgage?
You're not an idiot, but that idea has even more pitfalls, including it's probable that the interest won't be tax deductible due to recent-ish tax code changes. #askmehowiknow.  This is part of the reason I'm a frequent contributor at the Don't Pay Off Your Mortgage Club. All who wish to learn are welcome. Some people participate and still choose to kill their mortgages, but they are informed and they do it in an optimal way. (Dicey waves to SwordGuy.)

You can stop by any time: https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

And thank you, @Frankies Girl and @SwordGuy . IMO, this is a huge subject of interest for people approaching FIRE. I think it's so valuable it should be a sticky post.

Cb1234567

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Re: Morgages after FIRE?
« Reply #22 on: September 14, 2020, 12:10:46 PM »

have you considered just buying the house outright, and then refi to pull equity out, after the fact? Is the ACA subsidy worth it? Vs closing costs and headaches, I mean.


I did the math.   We pulled out $100k from taxable accounts for the downpayment, so we only had to pay taxes on capital gains on that money.   Taxes will be about $7k.

After that, if we pulled another $240k from 401Ksto pay the rest of the house in cash, we would be paying 24% tax, so we would have to withdraw $315,790 to cover the taxes.  I would have cost us an extra $75,790 not to have a mortgage.

And we don't get ACA subsidies, otherwise it would cost another $15,000 on top of that.

That's pretty pricey!    So I sucked it up and treated getting that mortgage like the 1/2 time job it was in order to push them thru the process in a timely manner.

As it stands now, we only owe $58,999 on the house because we put the proceeds of the old house and a non-profit flip house onto the mortgage as they sold over the next 8 months.   We'll be below $50,000 before October when the escrow money arrives.    We've paid $5911 in interest so far this year, so we're still almost $70,000 ahead of the all cash approach.

We have one more non-profit flip to sell and we'l pay off the mortgage with the proceeds.  Or we'll cash flow it and pay it off in less than a year from now.

But damn, sometimes those underwriters nearly pushed me to just buy the house for cash.   They were awful.   Had to have my accountant school them on how to calculate depreciation on rental properties.  Had to figure out the fannie mae/freddie mac guidelines for myself.   It was maddening.

Maddening is a good word for it. Unreal.

I hear you all on the tax ramifications - treading that narrow path is an art form. We lucked out and had enough money to buy (cheap house, so didnít have to sell any investments). And Iím looking forward to a gain with zero tax on it when our other house sells. Anything I can do with no taxes makes me happy.

I agree on the sticky idea for this topic (from Dicey). There are a whole host of issues to be figured out if youíre in No Manís Land of inconsistent income or atypical income, yet wanting to get a mortgage, etc. There are ways through, but ďmost peopleĒ donít do it that way, so itís like youíre speaking Greek explaining why you want a loan ...***and are less of a risk than someone with no money and loads of debt payments***...and you done have a j-o-b. I hear retired family friends even having problems with it.