Parents having trouble getting home loan

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slalom
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Parents having trouble getting home loan

Post by slalom »

My parents are newly retired (full retirement age), with plenty of savings and not taking 401k distributions yet.

They're considering move out to the west coast, and figured they'd need another $300k loan to buy a home in addition to selling their current house in a low COL area.

Despite having perfect credit scores, a few million in retirement funds, and another half a million in savings, they were only approved for a $150k mortgage. My dad gets max social security and a small pension, while my mom gets about half that in social security and a larger teacher pension.

They were surprised at how little they were approved for, with the loan officer for the housing development saying it can only be based on their income.

I'm wondering how this situation is usually dealt with. Are retirees expected to either start taking 401k to show income for the bank or pay cash for the home? I don't see what other options there are if one is trying to 'upsize' and move somewhere more expensive vs the more typical opposite of that. Even 2 good pensions isn't really enough to get a substantial home loan - I would think they'd consider the full financial picture.
Last edited by slalom on Mon Jul 26, 2021 5:04 am, edited 1 time in total.
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celia
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Re: Parents having trouble getting home loan

Post by celia »

slalom wrote: Mon Jul 26, 2021 12:33 am They're considering move out to the west coast, and figured they'd need another $300k loan to buy a home vs selling their current house in a low COL area.
Why haven’t they considered selling their current home? That will free up cash for the new one.
They were surprised at how little they were approved for, with the loan officer for the housing development saying it can only be based on their income.
Why are they trying to get a loan from the development company? They would be better off getting a loan from a credit union, bank, or mortgage company. In the worst case, they could even pay cash or make a bigger down payment.
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celia
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Re: Parents having trouble getting home loan

Post by celia »

slalom wrote: Mon Jul 26, 2021 12:33 am Despite having perfect credit scores, a few million in retirement funds, . . .
However, they may be facing a bigger issue than trying to get a mortgage. Have they considered what their RMDs might be after several years of growth in their retirement accounts and what those RMDs will do to their taxes? We don’t have any information here to know if they would be better off doing Roth conversion or early withdrawals.

At age 72, RMDs start at about 4% of their tax-deferred balances and the percentage increases each year after that.

They may want to consider doing Roth conversions before then to bring down the account balances and keep them out of higher tax brackets. Another option is to withdraw a chunk this year (while paying taxes on the withdrawal) so they can use it as part of the down payment for the house.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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galawdawg
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Re: Parents having trouble getting home loan

Post by galawdawg »

You may want to suggest to them that they look into an asset-based mortgage.

Loans backed by Fannie Mae and Freddie Mac can use investment and retirement assets towards the income requirements. Their formula takes 70% of qualifying assets (investments and retirement accounts) and 100% of cash holdings and divides it by the number of months in the loan product (one hundred eighty on a fifteen year mortgage, three hundred sixty on a thirty year mortgage) to determine the asset-based portion of their "monthly income" which is added to any other income, such as SS and pensions to be used according to their standard underwriting requirements to determine their maximum payment and loan amount.

If they have $2 million in investments (retirement and taxable), they can count up to $1.4 million divided by the number of months of the mortgage as your monthly income. So for a fifteen (15) year loan, that would be equal to a monthly income of $7,777. For a thirty (30) year loan, that would be $3,888 counted as monthly income. Cash holdings are not discounted. Divide cash by the months of the loan and add that to the numbers above. Then add in any social security and pension income. That total would be their "monthly income."
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Re: Parents having trouble getting home loan

Post by cadreamer2015 »

Not all financial institutions make these asset depletion mortgages that galawdog mentions, above, but they are definitely available. Have your parents look at other mortgage lenders or consider using a mortgage broker who knows which lenders will make these kinds of mortgages.
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grok87
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Re: Parents having trouble getting home loan

Post by grok87 »

what about a reverse mortgage? discussed here
viewtopic.php?f=2&t=348145
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RickBoglehead
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Re: Parents having trouble getting home loan

Post by RickBoglehead »

Asset based mortgage.

Should be no surprise on a traditional qualification, it is a formula. Whole picture is irrelevant, inadequate income is the reality. They should get pre-qualified on an asset based mortgage before shopping for a new home.
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ResearchMed
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Re: Parents having trouble getting home loan

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Has anyone here actually gotten an asset-based mortgage recently?
I'm wondering if the policies have changed from some time ago, when we looked into that.

We had enough to qualify, easily, but... the lenders we spoke with all required that we demonstrate two full years of withdrawals in addition to the "total IRA balance".

Well, we hadn't had any previous reason to remove any money from the IRA, which is, in part, why we had so much... straight savings and *not* spending/squandering/etc.!

That seemed nuts.
This was for a vacation home, and it turned out that we qualified based upon income alone, so it became moot.

Is this still a common requirement, to have a somewhat lengthy record of removing money every month so show... what? That one knows how to withdraw money? :annoyed

RM
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rustymutt
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Re: Parents having trouble getting home loan

Post by rustymutt »

Here in Oklahoma, I was told that I didn't make enough income monthly, and declined. Despite my over $ million retirement accounts. Debt free.
$2500 a month income supplemented only when needed of of retirement accounts. Keeps my tax average low. Banks are getting flakey acting, and proud of their cash holdings. hmmmm? What does this mean in the short term? Inflation?
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RickBoglehead
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Re: Parents having trouble getting home loan

Post by RickBoglehead »

ResearchMed wrote: Mon Jul 26, 2021 6:57 am Has anyone here actually gotten an asset-based mortgage recently?
I'm wondering if the policies have changed from some time ago, when we looked into that.

We had enough to qualify, easily, but... the lenders we spoke with all required that we demonstrate two full years of withdrawals in addition to the "total IRA balance".

Well, we hadn't had any previous reason to remove any money from the IRA, which is, in part, why we had so much... straight savings and *not* spending/squandering/etc.!

That seemed nuts.
This was for a vacation home, and it turned out that we qualified based upon income alone, so it became moot.

Is this still a common requirement, to have a somewhat lengthy record of removing money every month so show... what? That one knows how to withdraw money? :annoyed

RM
We have talked to several banks regarding an asset-based mortgage. What you describe is for an income-based mortgage, where they look at other sources of income - and two months of withdrawals shows your intent and therefore an income stream. https://www.cnbc.com/2020/09/01/heres-h ... ement.html

For an asset-based mortgage, you don't need ANY income coming in, they look at the assets. Not every bank does these. Chase does, I've heard (but not talked to) Bank of America also.

We'll be getting an asset-based mortgage for our retirement home, but ours will be qualified for with our taxable account balance, we won't be using (or showing) them our retirement accounts because they won't be needed. We of course do have income coming in, nearly all from the assets, but the income won't qualify us for the amount of mortgage we want. Therefore, the bank looks at the depletion of the assets to pay the mortgage, which is why they use a formula that divides by the number of months in the mortgage. Depending on the amount of mortgage we take on, we MAY be selling some assets each year to pay our bills, in addition to the income from the assets, until I collect Social Security. But with normal market growth, our asset base should continue to grow during that period.
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ResearchMed
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Re: Parents having trouble getting home loan

Post by ResearchMed »

RickBoglehead wrote: Mon Jul 26, 2021 7:23 am
ResearchMed wrote: Mon Jul 26, 2021 6:57 am Has anyone here actually gotten an asset-based mortgage recently?
I'm wondering if the policies have changed from some time ago, when we looked into that.

We had enough to qualify, easily, but... the lenders we spoke with all required that we demonstrate two full years of withdrawals in addition to the "total IRA balance".

Well, we hadn't had any previous reason to remove any money from the IRA, which is, in part, why we had so much... straight savings and *not* spending/squandering/etc.!

That seemed nuts.
This was for a vacation home, and it turned out that we qualified based upon income alone, so it became moot.

Is this still a common requirement, to have a somewhat lengthy record of removing money every month so show... what? That one knows how to withdraw money? :annoyed

RM
We have talked to several banks regarding an asset-based mortgage. What you describe is for an income-based mortgage, where they look at other sources of income - and two months of withdrawals shows your intent and therefore an income stream. https://www.cnbc.com/2020/09/01/heres-h ... ement.html

For an asset-based mortgage, you don't need ANY income coming in, they look at the assets. Not every bank does these. Chase does, I've heard (but not talked to) Bank of America also.

We'll be getting an asset-based mortgage for our retirement home, but ours will be qualified for with our taxable account balance, we won't be using (or showing) them our retirement accounts because they won't be needed.
This was definitely for "asset depletion" mortgage, and it required showing at least two *years* (24 months) of withdrawals, all of at least the size one would be using to "qualify". The preference was for a steady stream such that the amounts did not vary at all.
Then, the total in the "asset account(s)" had to be at least enough to support the full term of the mortgage, etc.

Like I wrote, it seemed nuts.
Maybe it was different because it wasn't for a primary residence? or maybe it was state or lender specific?
Anyway, it turned out we didn't need it, but it all seemed peculiar.

Good to know there are more reasonable ways to qualify for such a loan with some lenders.

RM
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Carefreeap
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Re: Parents having trouble getting home loan

Post by Carefreeap »

slalom wrote: Mon Jul 26, 2021 12:33 am My parents are newly retired (full retirement age), with plenty of savings and not taking 401k distributions yet.

They're considering move out to the west coast, and figured they'd need another $300k loan to buy a home in addition to selling their current house in a low COL area.

Despite having perfect credit scores, a few million in retirement funds, and another half a million in savings, they were only approved for a $150k mortgage. My dad gets max social security and a small pension, while my mom gets about half that in social security and a larger teacher pension.

They were surprised at how little they were approved for, with the loan officer for the housing development saying it can only be based on their income.

I'm wondering how this situation is usually dealt with. Are retirees expected to either start taking 401k to show income for the bank or pay cash for the home? I don't see what other options there are if one is trying to 'upsize' and move somewhere more expensive vs the more typical opposite of that. Even 2 good pensions isn't really enough to get a substantial home loan - I would think they'd consider the full financial picture.
Do they have an option to shop around for their own financing? Many times the development reps are not that experienced. If the house is in CA you can PM and I have a mortgage lender who is VERY good. She worked for BofA for about 20 years then went out on her own for the last 10. Unfortunately she is licensed only in CA so I couldn't use her to refi my AZ house.
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goingup
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Re: Parents having trouble getting home loan

Post by goingup »

galawdawg wrote: Mon Jul 26, 2021 4:21 am You may want to suggest to them that they look into an asset-based mortgage.

Loans backed by Fannie Mae and Freddie Mac can use investment and retirement assets towards the income requirements. Their formula takes 70% of qualifying assets (investments and retirement accounts) and 100% of cash holdings and divides it by the number of months in the loan product (one hundred eighty on a fifteen year mortgage, three hundred sixty on a thirty year mortgage) to determine the asset-based portion of their "monthly income" which is added to any other income, such as SS and pensions to be used according to their standard underwriting requirements to determine their maximum payment and loan amount.

If they have $2 million in investments (retirement and taxable), they can count up to $1.4 million divided by the number of months of the mortgage as your monthly income. So for a fifteen (15) year loan, that would be equal to a monthly income of $7,777. For a thirty (30) year loan, that would be $3,888 counted as monthly income. Cash holdings are not discounted. Divide cash by the months of the loan and add that to the numbers above. Then add in any social security and pension income. That total would be their "monthly income."
Excellent information. You are a terrific contributor of useful info on many topics! :beer
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Re: Parents having trouble getting home loan

Post by phxjcc »

slalom wrote: Mon Jul 26, 2021 12:33 am My parents are newly retired (full retirement age), with plenty of savings and not taking 401k distributions yet.

They're considering move out to the west coast, and figured they'd need another $300k loan to buy a home in addition to selling their current house in a low COL area.

Despite having perfect credit scores, a few million in retirement funds, and another half a million in savings, they were only approved for a $150k mortgage. My dad gets max social security and a small pension, while my mom gets about half that in social security and a larger teacher pension.

They were surprised at how little they were approved for, with the loan officer for the housing development saying it can only be based on their income.

I'm wondering how this situation is usually dealt with. Are retirees expected to either start taking 401k to show income for the bank or pay cash for the home? I don't see what other options there are if one is trying to 'upsize' and move somewhere more expensive vs the more typical opposite of that. Even 2 good pensions isn't really enough to get a substantial home loan - I would think they'd consider the full financial picture.
As was said upthread, they need to talk with a mortgage broker. I had no trouble getting a mortgage in a similar situation.
I did about a 60% LTV, 30 year fixed with Wells, no problem at all.

Just be sure that their debt-to-income (DTI) ratio is ok also.

ETA: while called "debt-to-income ratio" it is really debt-SERVICING-to-income.
The Fannie/Freddie underwriting criteria is all about rations so that they can resell the debt into the appropriate truanch
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Re: Parents having trouble getting home loan

Post by JoeRetire »

slalom wrote: Mon Jul 26, 2021 12:33 am My parents are newly retired (full retirement age), with plenty of savings and not taking 401k distributions yet.

I'm wondering how this situation is usually dealt with.
If they are working with a financial planner, they should discuss it. Planners can write a letter to their potential mortgage company explaining how the income necessary to pay the mortgage will be generated.
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Average Investor
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Re: Parents having trouble getting home loan

Post by Average Investor »

Chase and Rocket Mortgage both do asset based loans. Discounts are available for transferring assets to either Chase or Charles Schwab (for rocket mortgage). I am currently discussing a refi with both of these companies. I also tried Bank of America and was told no.
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slalom
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Re: Parents having trouble getting home loan

Post by slalom »

Thank you all for the help!

I'll have them look more into asset-based mortages. With the extreme pickiness of developers selling these days here, they demand a lot. My parents like the development however it seems like they won't even put you on the list to talk to you about any of the lots that come up until you get pre approved (not pre qualified) with their loan person. Maybe I have that wrong though so I'll ask again.

And Carefreeap, I may take you up on that! :)
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Re: Parents having trouble getting home loan

Post by michaeljc70 »

Having been in a similar situation before, I am curious how the asset back mortgage works. Specifically, can you get one based on retirement accounts if under age 59.5? I was unable to get a mortgage when I bought my current home due to being newly self employed. I was told it didn't matter if I had a million bucks in the bank by multiple mortgage brokers. Of course, they could have not offered or been aware of asset based mortgages. I wound up paying cash for the home. It struck me as amazing that someone that could pay cash for a home (with excellent credit) could not get a mortgage.
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Re: Parents having trouble getting home loan

Post by Shorty »

Ideas on paying cash, with the option to get a mortgage from any lender later? I’ve done this with a car years ago. Would you have to double pay items (e.g title insurance)?
fortunefavored
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Re: Parents having trouble getting home loan

Post by fortunefavored »

michaeljc70 wrote: Tue Jul 27, 2021 6:48 am Having been in a similar situation before, I am curious how the asset back mortgage works. Specifically, can you get one based on retirement accounts if under age 59.5? I was unable to get a mortgage when I bought my current home due to being newly self employed. I was told it didn't matter if I had a million bucks in the bank by multiple mortgage brokers. Of course, they could have not offered or been aware of asset based mortgages. I wound up paying cash for the home. It struck me as amazing that someone that could pay cash for a home (with excellent credit) could not get a mortgage.
I explored alternative lending too, I could not find anything at a reasonable interest rate either (despite millions in brokerage accounts) - there must be some elements missing from these threads that are not obvious (age? locale? I don't know.)

The few places that would do various asset based mortgages wanted 3-4% higher interest rates with exorbitant closing costs.
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Re: Parents having trouble getting home loan

Post by MarkerFM »

michaeljc70 wrote: Tue Jul 27, 2021 6:48 am Having been in a similar situation before, I am curious how the asset back mortgage works. Specifically, can you get one based on retirement accounts if under age 59.5? I was unable to get a mortgage when I bought my current home due to being newly self employed. I was told it didn't matter if I had a million bucks in the bank by multiple mortgage brokers. Of course, they could have not offered or been aware of asset based mortgages. I wound up paying cash for the home. It struck me as amazing that someone that could pay cash for a home (with excellent credit) could not get a mortgage.
I did two asset depletion mortgages with a major investment bank where I had accounts at the time, well under age 59.5. I don't recall the details, so I can't tell you whether tax-deferred assets are part of the calculation. In my case, taxable accounts held enough to qualify. I'm responding primarily to say that asset depletion mortgages aren't made on the basis of a borrower having more money in the bank than the loan amount (for example you have $1 million and only want to borrow $750k). They are made on by imputing income on the portfolio and using that for the debt to income ratio. In other words (and I don't remember the formula), they use something akin to a low withdrawal rate to calculate income. For example, on a $1,000,000 portfolio, they might use $30-40K as the income figure.
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Re: Parents having trouble getting home loan

Post by grok87 »

Shorty wrote: Tue Jul 27, 2021 7:08 am Ideas on paying cash, with the option to get a mortgage from any lender later? I’ve done this with a car years ago. Would you have to double pay items (e.g title insurance)?
yes you have a certain window of time (60 days?) for it still to be considered a purchase mortgage
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Mike Scott
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Re: Parents having trouble getting home loan

Post by Mike Scott »

Is a 401k loan an option?
sawdust60
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Re: Parents having trouble getting home loan

Post by sawdust60 »

see prior thread. Mortgage for Retiree: viewtopic.php?p=5553050#p5553050
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