Problems Getting a Mortgage if you are Asset Rich, but Have Little “Income”

So, you’ve worked hard all your life, saved and invested smartly and now you’d like to retire and enjoy yourself. That’s all well and good, but you might have a problem getting a simple mortgage.

Let’s say that you live up north, have your house paid off and would like to sell it and move to your dream house in Florida or Arizona. Maybe you have decided to delay your Social Security until you are 70 and earn 8% a year while you wait. So in effect, you have little or no income other than maybe a small pension or two and dividend and interest. Your financial advisor suggests you invest the proceeds of your house up north and take out a mortgage on your new Florida home. Since mortgage interest rates are around 4% and are tax deductible this might make good sense.  When you apply for your loan the new mortgage rules call for 43% debt to income ratio, but you no longer have “income”. Under the new rules the banks want to see a demonstrated process where you are already turning investments into income. Your substantial base might not qualify, as such, for even a smaller $100,000 – $250,000 mortgage.

Here is what you can do well before you try and apply for a new mortgage:

  1. Reduce your debt, you are retired and no longer have a paycheck. Once you get a budget in place you can go back to enjoying your new retirement life.
  2. Make sure there no other obstacles to getting a mortgage, for example your Credit Score. It is helpful to have an 800+ credit score.
  3. If you are going to hold your new house in a revocable trust along with your other assets, set it all up ahead of time. You’ll still need to meet the income retirements.
  4. Even though you want to delay Social Security until you are 70, start it at least 3-4 months before applying for your loan, you now have income. You can later (within 1 year) stop Social Security and send them all the money back, with no penalty.
  5. Modify your investments in your taxable account so that you are generating a good bit of monthly and quarterly dividend income. Check the ex-dividend and payment dates so that you can prove income.
  6. Set up a systematic, monthly withdraw from your brokerage account into your household checking account and make sure you have 3-4 months of proof these transactions took place.

With the above steps in place you should now have “income” to meet the debt/income ratio. You’ll feel pretty secure that once the closing on the new house has taken place and the boxes are unpacked you can reverse some of the steps shown.

Enjoy your retirement.