Mortgage qualifying when retired

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RickBoglehead
Posts: 1181
Joined: Wed Feb 14, 2018 9:10 am

Mortgage qualifying when retired

Post by RickBoglehead » Wed Feb 14, 2018 9:27 am

Trying to understand how things will work in retirement.

I understand how to qualify for a mortgage when employed with an income stream, housing to expense ratio, debt to income ratio. Will be retiring in a few years and plan on purchasing a home in warmer climates, and likely selling our main home. Income stream will initially consist of dividends, interest, and earnings. However, earnings will be below that which would qualify us for what we'd want to buy (and can afford). Selling our existing home will return cash roughly equal to that which we will put into the new home, but we don't plan on putting in more. Happy to live with a mortgage at 5% or lower, and earn more than that in the market (although will be reassessing when we do our 2018 taxes under the new rules).

I know that lenders will consider the asset depletion method, taking 70% of our assets, dividing by 360, and using that number to come up with a monthly income number. Does that number also get added to the actual income stream? That's what I'm unclear on. Is it both methods, or one or the other?

Second, when we do this we will be roughly 5 years from when we want to collect Social Security, assuming we hold out until we have to. Will the lenders look at Social Security income potential and say "they COULD collect it sooner if they needed to to pay the mortgage, so let's calculate that?" Or, will they say "they'll get $XX,XXX in 5 years"?

Thanks for any insight from those in the lending business.

Wagnerjb
Posts: 7203
Joined: Mon Feb 19, 2007 8:44 pm
Location: Houston, Texas

Re: Mortgage qualifying when retired

Post by Wagnerjb » Wed Feb 14, 2018 2:57 pm

Rick: I will share with you my experience and maybe it will help you see what might happen in your case. I built a home right before I retired and I qualified for the mortgage with my income. However, about 18 months after I retired I refinanced the mortgage. It wasn't nearly as easy to qualify at it should have been.

First, the bank asked if I had pension income (no) or social security (not for another 10+ years). Second, they asked if I had regular withdrawals from my investment accounts. Yes I did, but not the "regular" that they wanted to see. I withdraw every few months as necessary for cash flow. They were looking for a constant amount each and every month. Sorry.

I told them that my assets were easily 10x the mortgage value, but that didn't help at all (most of my assets are in tax-deferred and I prefer not to take a big tax hit to pay off the mortgage).

We finally hit pay dirt when I mentioned that I get regular quarterly withdrawals from an executive deferred compensation plan. My plan is invested in equities, and I get a payout over 5 years, beginning one year after retirement....so I had actually received the first quarterly distribution before I tried to refinance. I told them that the amount of the quarterly distribution is dependent on the value of the investments, and that troubled their simple minds. Obviously, they wanted a fixed number to plug into their program. Sorry. After a bit of back and forth - including me providing them with the plan documents and investments - they got satisfied.

In my case, they were happy even though the quarterly distributions are only for 5 years, after which the assets will be completely depleted. For this reason, I doubt that your possible Social Security income in 5 years will be of interest to your bank.

My experience is that you can get a mortgage, especially if your assets are ample in relation to the mortgage amount. Personally, I refuse to change my investments in any way to satisfy the bank....such as making regular monthly withdrawals, buying income-producing investments to give them a regular yield to use, etc.

Best wishes.
Andy

RetiredCSProf
Posts: 179
Joined: Tue Feb 28, 2017 4:59 pm

Re: Mortgage qualifying when retired

Post by RetiredCSProf » Wed Feb 14, 2018 6:07 pm

Lenders look for guaranteed income, a good credit score, and equity in the home.

I am 70 and have been retired for several years. I recently applied for a HELOC. The lender asked for the following:
- credit score
- evidence of social security monthly payments
- evidence of monthly pension
- access to summary of recent tax returns
- most recent quarterly reports from tax-deferred retirement accounts (but they chose not to include RMDs as income)
- appraisal on the home

They did not consider the following:
- Roth accounts and other real estate that I own
- the variability of my pension -- it's based partly on the performance of investments, which can fluctuate on an annual basis
- expenses -- I am leasing a car and I have a child in college

delamer
Posts: 6385
Joined: Tue Feb 08, 2011 6:13 pm

Re: Mortgage qualifying when retired

Post by delamer » Wed Feb 14, 2018 6:29 pm


RickBoglehead
Posts: 1181
Joined: Wed Feb 14, 2018 9:10 am

Re: Mortgage qualifying when retired

Post by RickBoglehead » Thu Apr 12, 2018 11:47 am

First, I want to apologize for not coming back to this thread. As my first post, it had to be approved, and I guess I either missed that email or it wasn't sent. Then, since I wasn't subscribed, I had no idea there had been replies.

Thanks for the replies. I've contacted a few banks, and none of them had a clue about the asset depletion method that I referred to, and that delamer linked to. Each one was only interested in income stream, specifically regular monthly. So, if I am not taking a regular monthly withdrawal from my accounts, they're not interested. I have the same perspective as Wagnerjb, in that I'd be withdrawing funds from my investment accounts as I need funds, and not before, with the exception that I currently reinvest my bond funds and not my equity funds (in my taxable accounts) so as to help maintain my equity / bond balance as much as I can.

One alluded to the asset depletion method being perhaps used for non-jumbo loans. Since I expect to be taking out a jumbo loan, they said it wouldn't apply.

I plan on continuing my research over the next year as we look and ponder on places to live. But we'll be pre-Social Security and won't have any pensions or equity plans (wife's pension will be < $300 a month).

cadreamer2015
Posts: 700
Joined: Wed Apr 08, 2015 1:52 pm
Location: North County San Diego

Re: Mortgage qualifying when retired

Post by cadreamer2015 » Thu Apr 12, 2018 12:15 pm

Try Bank of America. I got an asset depletion mortgage from them. Also talk to mortgage brokers. They will know which lenders do asset depletion mortgages.
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delamer
Posts: 6385
Joined: Tue Feb 08, 2011 6:13 pm

Re: Mortgage qualifying when retired

Post by delamer » Thu Apr 12, 2018 1:03 pm

cadreamer2015 wrote:
Thu Apr 12, 2018 12:15 pm
Try Bank of America. I got an asset depletion mortgage from them. Also talk to mortgage brokers. They will know which lenders do asset depletion mortgages.
Good suggestion regarding the mortgage brokers.

You also could do a search for “portfolio lenders” in your area. They keep their loans in-house, so often are more flexible than lenders who sell theirs.

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