Most early retirees have no pension, annuity, or Social Security income. Even if you’re a traditional retiree, you might have only one of those income streams. But what if your lifestyle plans require a home purchase?
Even if you have the savings to afford a house, you might not necessarily be able to liquidate enough of those assets quickly in a tax efficient manner. So you’ll need a mortgage. But most conventional mortgage loans are based on income. If you can’t show income, how do you go about getting a mortgage?
When we retired, downsized, and moved west I swore I’d never own another house. My post about our move across the country spells out the high quality of life we’ve achieved as renters — without the obligations of home ownership.
And my article about renting vs. buying — one of the most popular on this site — lays out a procedure for analyzing the rent vs. buy decision. It’s a financial analysis that, in today’s world, is by no means guaranteed to support buying as the superior option….
But I have never denied the emotional benefits of home ownership. There is an element of control and security in owning the property where you live. I’m not immune to that feeling.
We owned our home for the 17 years we were raising our son in Tennessee, and were content. But, for the past four years, other factors have clearly made renting the better choice for us.
Buying a Home in Retirement
Now, the scales may be tipping as we get visibility into later stages of retirement. The prospect of home ownership has again dawned. Up to now, we have loved our vagabond lifestyle, traveling the west from our home base in Santa Fe.
Buying a home now would be a tacit acknowledgment that we were “settling down” in one place for our retirement. But this would be no snap decision for us. Our financial independence hinges on keeping our nest egg working hard. We can’t afford a six-digit mistake.
And, if we were to buy a home, another problem presents itself: We can well afford it, on paper, but where would we get the cash? Yes, we do keep a few years of living expenses on hand. But we don’t have any more than that lying around.
The proceeds from our previous home sale in Tennessee have long since been folded into our growing portfolio. And, our other investment positions go back many years. So we can’t sell assets without incurring large capital gains taxes. This all means we would need a mortgage….
But we, like other early retirees, aren’t the typical mortgage applicants. No W-2, Social Security, pension, or annuity income. We aren’t even withdrawing from our IRAs yet. Still in our late 50’s, and without steady income, we have nothing but assets….
Jumping Through Hoops to Get a Mortgage Without Regular Income
We already experienced jumping through special hoops to document our assets when we applied for our current rental. So, would a bank even lend us money for a mortgage? I decided to find out in advance of the need….
If you Google for “asset-based” mortgages you’ll get hits. But they’re mostly from the financial press. There are a few articles about the “asset depletion” rules for loans backed by Fannie Mae and Freddie Mac. They can use assets such as IRAs and 401(k)s to allow mortgage applicants to meet income requirements.
However, the reality as I started calling around was somewhat different: Not every institution I talked to offered an asset-based mortgage, and those that did had widely differing rules for valuing your assets as income. Most critically, the interest rates varied widely: The spread was more than 2%.
Shopping around is absolutely essential if you’re in the market for an asset-based mortgage. You’ll need due diligence to find an adequate loan at a competitive interest rate.
My first stop for mortgage shopping was my trusted bank of several decades and a favorite financial institution. But USAA had nothing to offer me.
The loan officer told me that unless we could show a “set” amount of income that we were receiving every month from a financial institution in retirement, we couldn’t qualify for a mortgage there. Disappointing.
Given our early-retired status, and my ad hoc system for performing retirement withdrawals, committing to a monthly withdrawal from our accounts at this point would be grossly inefficient.
For starters, being younger than 59-½, we would have to do a 72(t) distribution to avoid the 10% penalty. And that would commit us to at least 5 years of unnecessary withdrawals. Just to get a mortgage, we’d be introducing financial complexity into our life and probably growing our remaining assets sub optimally. No thanks.
The loan officer was unaware of any guidelines for deriving income from assets. I love USAA and recommend them as an institution. But I’ve had mixed experience with their agents over the years, when it comes to our unique early-retired situation.
It’s a reminder not to turn off your brain, or stop looking after the first opinion, when seeking financial advice. I’ve met plenty of “experts” over the years who only know the minimum required to guarantee their own paycheck.
Charles Schwab / Quicken Loans
After USAA, I contacted Charles Schwab, custodian for some of my non-retirement money. Schwab advertises mortgages prominently on their web site and in email campaigns, and I was curious to see what they offered.
Turns out that Schwab’s mortgage business is administered by Quicken Loans. I was assigned a dedicated purchase banker there who worked only with Schwab clients. And, over the course of a couple phone calls, I found him to be an efficient and reliable contact.
Quicken Loans could offer me not only their conventional mortgage products, but some more specialized “non-agency loans,” coming from Schwab itself. And one of those turned out to be best for our situation. It required a 20% down payment and documented assets, but no income or tax returns.
The formula for computing the eligible loan amount was based on 60% of retirement assets (if you’re below age 59-½) plus 70% of non-retirement assets. It then computed a monthly income assuming 2% growth and 360 payments (30 years).
Of that computed monthly income, the mortgage payment including taxes/insurance/HOA could constitute about 45-50%. Given that mortgage payment, and the interest rate for the loan, you can then calculate the loan amount.
In New Mexico they could offer us a 30-year ARM (Adjustable Rate Mortgage) fixed for 5-10 years, with competitive rates. (That included a 0.25% discount for Schwab customers, making it especially competitive.)
They couldn’t offer a 30-year fixed-rate mortgage. That’s less of an issue for us, because this mortgage would be about managing cash flow in the short term. We’d almost surely pay it off in 5-10 years anyway.
Exploring Local Options
After talking with the two national companies, I decided to contact local mortgage brokers in a couple of regions where we could conceivably settle down if not New Mexico: Colorado and Tennessee. Both contacts were helpful, though neither turned out to be as competitive as Schwab/Quicken Loans….
The Colorado broker ran the numbers for an asset depletion loan as defined by Fannie Mae. In this case the loan amount would be based on retirement assets only, with a 10% reduction since we were younger than 59-½.
A 30% down payment coming from different assets would be required. The calculation then simply takes 70% of the retirement assets and divides by 360 to produce an eligible payment amount.
Next I spoke with a friend of a friend in the mortgage business in Tennessee. His company had offered a Fannie Mae asset-based loan before a recent ownership change. Now they could offer an “asset depletion program” with generous loan amounts, but not-so-competitive interest rates.
Their formula used a straight 15-year depletion with no growth. So it simply divides your total assets by 180 (15 years x 12 months/year) to get a payment. In our case, the implied loan amount was 2-3 times the size house we had targeted! So no problem with loan amount. But the rates were nearly 2% higher than the other options.
So this quote was a non-starter given the much lower rates we’d already been given. The broker did helpfully suggest that we try working with a local bank in town which held their own mortgages (sometimes called a “portfolio bank”). They might be able to give us a better rate.
Alternatives to Getting a Mortgage If You Don’t Have Income
Given my research, it seems we’ll have no trouble qualifying for an asset-based mortgage, with Schwab/Quicken Loans being the leading contender. But, if we couldn’t qualify, what would be our other options?
Manufacturing Income to Get a Mortgage
For starters, could we just produce more income to show on our 1040? Yes, in theory we could tilt our investments toward dividend payments. And/or we could harvest more capital gains than needed for our retirement living expenses.
This artificial investment activity would likely cost us in fees and taxes, but might be worth it if we could qualify for a mortgage no other way.
However, according to one of the loan officers, we’d need at least two years of tax returns showing adequate dividend income. And banks are skeptical about counting future capital gains: The burden would be on us to prove those could continue for at least three years.
Security-Backed Line of Credit
So I explored another option, sometimes called a Security-Backed Line of Credit (SBLOC). This is not a mortgage loan secured by real property but rather a line of credit secured by your investment securities.
I called Schwab and talked to a regional banker about their Pledged Asset Line (PAL) to find out how it would work. Compared to most housing loans, the terms are blessedly simple: They will loan you up to 75% of your total liquid non-retirement assets for a term of 5 years, which can be renewed.
There are generally no fees, and as long as there is credit to cover the amount of interest due, no monthly payment is required. The quoted interest rate — variable and possibly negotiable depending on your assets — was pretty competitive.
But there are downsides: The assets you pledge as collateral must be held in a separate account. You can trade in that account, but you can’t make withdrawals without the bank’s consent. So you couldn’t tap that money even for a short-term emergency.
Secondly, if the value of your investments decline by more than 10%, you will need to deposit money or sell securities, possibly at a loss, to avoid a default. It’s very similar to a margin loan, though with slightly more generous parameters.
For me, that’s just too risky. Buying a home is stressful and expensive enough already, without introducing market risk into the equation.
Home Equity Conversion Mortgage for Purchase
The last option for some who want to finance a home without steady income in retirement is known as a Home Equity Conversion Mortgage (HECM) for Purchase. This uses a reverse mortgage at the time of purchase to finance a portion of the home.
But it often covers only about half of the purchase price. You would need cash available to pay the difference.
And, since all owners must be at least age 62, this isn’t an option for us, yet. Finally, given that reverse mortgages are complex and potentially expensive, this approach should be a last resort for many….
Buying a House, or Not
So I’ve learned that if you’re a retiree with little to no documented income, but plenty of assets, you can certainly get a mortgage to buy a house. And you can probably find a competitive interest rate. But you’ll need to shop around.
Some mortgage brokers won’t be familiar with these asset-based kinds of loans. And others won’t necessarily have competitive products to offer.
In our case, it’s a relief to know that, if we find the ideal home for our golden years, we can get the financing to buy it, without having to sell assets and incur large capital gains in a single year.
That solves the financial problem, but leaves the emotional one….
Do we really want to complicate our simple renters’ life with the obligations, constraints, and risks of home ownership? Are we ready to commit to living in one area for the years it would likely take to recoup our transaction costs?
If not, a blunder of the magnitude involved in purchasing a house could severely damage our financial independence.
Are the benefits of owning a home again really worth the costs to us? Stay tuned to find out….
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This post was originally published on August 28, 2017 and most recently updated on October 6, 2021.
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[The founder of CanIRetireYet.com, Darrow Kirkpatrick relied on a modest lifestyle, high savings rate, and simple passive index investing to retire at age 50 from a career as a civil and software engineer. He has been quoted or published in The Wall Street Journal, MarketWatch, Kiplinger, The Huffington Post, Consumer Reports, and Money Magazine among others. His books include Retiring Sooner: How to Accelerate Your Financial Independence and Can I Retire Yet? How to Make the Biggest Financial Decision of the Rest of Your Life.]
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