Asset-Based Loans for Retirees
I have found that some of my clients who are retired have experienced some challenges or roadblocks in navigating how to obtain a loan to purchase a new home in retirement. Although some retirees may have the cash to purchase real estate with interest rates low they may prefer to have a low-interest loan and use their cash to invest elsewhere. Often, retirees have assets but little to no income. Or, they have a lot of equity in a home or real estate investments, but may not want to liquidate those. Fortunately, there are loan programs available that take into consideration retiree’s unique situations.
Retirees may have pensions, annuities, 401k’s, or social security income. When purchasing a home some of these assets do not traditionally help you when qualifying for a loan. Most conventional mortgages are based on your income and lenders are interested in your income being “predictable, and likely to continue.” So if you are not income-heavy, or without income in retirement, lenders have to utilize your assets. Distributions from 401k’s or IRA’s are considered by mortgage companies to have a defined expiration date because they involve the depreciation of an asset. If you are obtaining a loan you have to document that your money from those retirement sources is expected to continue for three years after you apply. Typically, lenders can only use 60-70% of the value of those retirement accounts to determine how many distributions remain when evaluating your “income” and “available assets.” Additionally, retirees must also have unrestricted access to these accounts without penalty. Social security income that a borrower is drawing from is considered income that lenders can use. Some borrowers who have yet to take social security withdrawals due to age or choice may consider doing so to create more income when applying for a loan.
Here are a few other points to consider for an asset-based loan:
Freddie Mac allows the cash value of a life insurance policy to be counted as a qualifying asset.
Fannie Mae also allows borrowers to use vested assets from retirement accounts for the down payment, closing costs, and reserves.
Most asset-based loans can be used on primary residences and second homes, not on investment properties. New construction and refinances are okay.
Annuity equity can be used as long as the borrower can provide documentation.
What does liquid “assets mean?” Your funds need to be easily accessed to qualify. Equity in real estate would not apply unless you took out a home equity line of credit. In addition, you need to be 59.5 years old to be able to access retirement funds.
Reverse mortgages could be an option for purchase as well but in many cases should be a last resort. The loan enables you to put 50% down and never have to pay a monthly mortgage payment. Essentially you are borrowing against your equity.
Physician/Doctor Loans~ If you are a doctor, specifically (MP, DDS, OD, DPM, DO, RPH, medical resident, or type of Dental Surgeon) can utilize this loan. The loan requires at least one of the borrowers to be a doctor and you must be buying a primary residence. The loan allows a doctor or resident to purchase a home with up to 95% financed and the main benefit is they allow you to exclude student debt from your debt-to-income ratio. Additionally, you do not have to pay PMI (private mortgage insurance) even though you may choose to put less than 20% down. In some cases, you can qualify using future income and salary increases.
Loan Secrets to Pay off Your Mortgage Sooner~ 1)Pay half your mortgage every two weeks which = 26 half-payments a year and 13 full monthly payments. This can knock up to 8 years off a 30-year mortgage. 2)Make an extra house payment each quarter and you’ll pay off your mortgage apron 11 years early. 3)Refinancing into a 15-year mortgage can be a great solution if you can absorb the higher monthly payment. Ultimately you have to decide your long-term goals in the home and whether putting additional money towards your mortgage is beneficial vs. investing it in another pie such as a 529, 401k, SEP, or saving to buy more real estate. If you would like more information on these loans, I would be happy to connect you with a mortgage broker.