Kink in early retirement plan - follow up thread

[disneysteve]

http://www.savingadvice.com/forums/personal-finance/49761-thoughts-early-retirement-plan.html

Last year, oddly enough exactly one year ago today, I posted this thread. I wanted to update this situation and get opinions on a problem that cropped up.

EEinNJ is the winner for finding the flaw in the plan:

Major flaw? No Job= Not Qualifying for a mortgage. At least, that's the way it used to be, and I hear lenders are going back to that.

My cousin retired as planned at the end of May, 3 months after turning 55. He is living just fine on non-retirement savings and has spent time fixing up the house and getting it on the market. It is now under contract to sell with an anticipated settlement date in January.

He contacted a mortgage broker in Florida, where he will be moving, and laid out his situation. The broker said he couldn't help him. The mortgage company wouldn't make a loan to someone without seeing documentation of a 3-month income stream. My cousin called a second place and got the same answer.

The suggestion that came up was to take a distribution from his retirement plan for November, December and January. That would provide the needed documented income. The problem with that is that he is only 55 and would have to pay the early withdrawal penalty to do that. If he takes out $3,000/month for 3 months, that means paying a $900 penalty.

He has plenty of assets and finds it ridiculous that he can't get a mortgage based on his personal wealth. I said that he needs to find a lender that will do manual underwriting rather than just a cookbook denial. If he can sit down with an intelligent human being and show how much money he has, I can't imagine him not being able to borrow 150K for 5 years.

Any thoughts or suggestions?

[jIM_Ohio]

Steve-

People on other boards tell me they get loans without income, however one BIG distinction is they may have money in taxable accounts. That changes the assets as far as underwriting is concerned (200k in a taxable account is >>> than 200k in a 401k or IRA).

I would also suggest he move his IRA to something affiliated with a bank, then ask the bank for a loan, if not, move the IRA to a different bank, and rinse/repeat as needed until a bank sees they only get 500k-$1 M of IRA money on the books if they lend money for a mortgage.

Focus on businesses with PEOPLE- which means focus on current bank family member does business with (and sell the "relationship" angle) meaning if bank wants a good relationship, they need to help the customer.

[disneysteve]

Thanks, Jim. I think he has asked the bank that holds his IRA but I'm not 100% sure of that. As for distribution of funds, the proceeds from the sale of the house would sit in a taxable account and represent more than the amount he would be borrowing. Plus, he has other money already in taxable accounts. That's what he is currently living on.

[jIM_Ohio]

Thanks, Jim. I think he has asked the bank that holds his IRA but I'm not 100% sure of that. As for distribution of funds, the proceeds from the sale of the house would sit in a taxable account and represent more than the amount he would be borrowing. Plus, he has other money already in taxable accounts. That's what he is currently living on.

Thx for details
I would then take business to the bank next door- maybe even schedule a meeting with the bank's loan officer and bank's president- and tell those people he wants the bank to put together a business plan where he would move all his accounts to that bank in exchange for a mortgage of $X and a savings account of $Y.

He needs to look at this like a business transaction more than as a consumer IMO.

[disneysteve]

Most ironic thing is he just retired from a 30-year career in banking. He was the bank compliance officer for the past 5-10 years and was in management prior to that.

[Joan.of.the.Arch]

He could look into borrowing at a credit union where he wants to buy, as the financial health of the local community is always, as far as I know, part of the "mission" of a credit union.

Also, maybe he could look for a seller who would arrange private payments, at least for part of the purchase price.

[jIM_Ohio]

Can he take out a HELOC on current property?
could he pay cash for new house, then take a HELOC on that?

[disneysteve]

Can he take out a HELOC on current property?
could he pay cash for new house, then take a HELOC on that?

He can't do a HELOC on the current property because he is selling it.

He could pay cash for the new house but would he qualify for a HELOC with no income or would he have the same problem as with a mortgage?

[jIM_Ohio]

Steve-

try this

remove house from market
take a HELOC on current house
use the HELOC proceeds to put money down on a new house (put down 50% for example and finance other 50%). The 50% NOT financed should be in cash as part of the HELOC.

** if current house was worth 300k, take out a 200k HELOC, put 100k down on new 200k house, and put other 100k from HELOC in a cash account. Once new house is closed, take a HELOC out on NEW house (pull out 25% of equity) and then pay off HELOC on OLD house, then sell house. Or sell house then pay off HELOC on old house.

You should be able to sell a house with a HELOC on it- I have done that before and paid off the HELOC with proceeds from the sale.

Get the new house before liquidating old house- it might force banks hand more.

[disneysteve]

But can he get a HELOC with no income? If they won't give him a mortgage, why would they give him a HELOC? They are both collateralized loans secured by the property.

[jIM_Ohio]

But can he get a HELOC with no income? If they won't give him a mortgage, why would they give him a HELOC? They are both collateralized loans secured by the property.

If there are no other liens on property "maybe".

Advantage of a HELOC is that it is like a credit card with house as collateral. Some people use it as their EF for example. Just because he has it does not mean he uses it (like a cc). Once he uses it, the payback terms are again like they would be on a cc. The interest is tax deductible too. He does NOT have to tell the bank what the HELOC will be used for and I would suggest he NOT tell them he is moving.

[irmanator]

why can't he use profits from selling old house to pay for new house?

[maat55]

Dave Ramsey recommends this mortgage for an underwritten mortgage.


Mortgage Loans, Refinance | Churchill Mortgage

[disneysteve]

why can't he use profits from selling old house to pay for new house?

If he did that, he wouldn't have enough money to cover living expenses between 1/2011 and 8/2014 when he can start drawing from his retirement accounts. The plan is to sell the current house, buy the new house with a 5-year ARM, invest the proceeds from the house conservatively and draw from that to pay the mortgage and cover living expenses. When he turns 59-1/2, pay off the mortgage and start drawing from Roth/401k/pension to cover living expenses.

[snafu]

DS: Has DC personally visited mortgage brokers or been seeking financing on-line? Many brokers have contacts or links with colleagues in other cities. I presume he could get a loan with a co signer like yourself. There is a lot of age-ism out there, discrimination based on age. As you can see your FICO score or credit rating may shave a few point on your mortgage but there are other qualifiers. Lenders seem to have bent the pendulum too far the other way. The housing market can not recover while lenders are that tight fisted. That is the formula for more bank failures. ooohoooh