@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.