Stress. It’s been part of life the last 40 years as you’ve built a career and raised a family. Now you’re hoping to reduce stress and that is likely a consideration in exploring downsizing.
Obtaining a mortgage includes a certain amount of stress. The goal of a loan originator is to reduce that stress by properly preparing the borrower for the process. A person making a next-stage purchase likely has gone through the process several times including refinances, and has a certain amount of expectation that could very well not be correct. Purchasing or refinancing a first home can be very different from purchasing while you own another home and when you are retiring.
Understanding the mortgage process going forward will hopefully reduce that stress. Even if you plan initially to rent, it’s important to understand the issues that could impact your ability to get approved should you decide to buy a home in the near future. I apologize in advance; this material is pretty dry. However, it’s important to help in your process. Perhaps read one point per day to avoid getting too bored, but please read them all.
1. Departing property. If you are selling the current residence (departing property) and buying a new home at the same time, a possible challenge could relate to the requirement to include the debts from both properties in calculating debt to income. If forced to include both debts, the buyer may not be approved for the new mortgage. If the departing property is sold before you buy the new home, mortgage companies certainly can ignore the debts from the departing property. However, if you plan to close on the purchase before the sale happens, the bank may not be able to ignore those debts and therefore if your income is not sufficient to support both mortgages and tax payments, you may not get approved.
There are several solutions for this. Most banks are willing to ignore the liability of the departing property if you have a contract of sale for the property and evidence that the buyer has a mortgage approval. It is imperative to be clear what your bank requires in order to avoid the payment. You don’t want to find out at the last minute that the old debts won’t be ignored and your application will be denied. There are some institutions that will actually ignore the liability if you can simply present evidence that you have listed your home for sale. There are other requirements for this program, and not all borrowers are eligible for it, but it provides great flexibility in case your sale process is not that far along. Another option is if you decide to rent the departing property rather than sell it, many banks will include the rental income for the home in calculating the debt to income ratio (DTI). Such programs generally require the need for a lease and security deposit. Not all banks will allow for this, so you need to ask.
2. Unfortunately, many people retire at the same time they seek to purchase a new home and they don’t realize that despite the fact that they’ve earned $1 million a year for the last 30 years, if they’re not currently employed, the bank can’t use any of that former income. The bank will do a verification of employment with the goal of confirming that current employment will likely continue for another three years. While there’s no guarantee anyone will remain employed, if the borrower just retired or is about to retire, the current employer will not be able to verify continued employment.
One solution would be to delay retirement if someone is considering making a purchase. Another solution deals with using assets to calculate income. Many banks have asset dissipation programs whereby the bank calculates a monthly income based on the total amount of investable assets. Different banks calculate that number differently. For example, one form of calculation takes the full amount of assets and divides that number by the number of months in the loan term. i.e., a borrower with $10,000,000 in assets who is seeking a 30-year loan would be $10,000,000 divided by 360 or $27,777 per month.
Another idea to consider regards those people using proceeds to buy without a mortgage. You may not want a mortgage as you begin to expect less income. If you are working now but may retire soon, keep in mind you may be able to be approved now for a mortgage and you may not be after you retire. Speak with a lender to be sure of the possible consequences if you need the funds down the road and you are not able to get approved. Remember, you can always repay the mortgage at any time, but you may not be able to get the loan if you need it later.
3. While this may not be relevant to downsizing, many people in our age group might be helping our children purchase a home by either giving them down payments or more importantly, cosigning their loans. This is important because this is your debt and it will be considered when you seek to purchase your new home. For example, if you cosign your son’s mortgage in February and then try to buy a home in July, his mortgage amount will be included in your debts and if it pushes your DTI too high you won’t be approved. I am not suggesting not to cosign for him but to understand the issues.
One workaround is that as long as your son pays the mortgage for 12 months, the bank will typically not include that debt towards your DTI calculation after proof of 12 monthly payments by him. However, it’s important that not a single payment comes from you. Your son needs to make every payment. If your son absolutely does not have the money to make the payment on his own for one month, he should figure out how to find the funds so that he can make the payment. No matter what, you must not make the payment from your account. In addition, make sure the son is not late on any payments because that will count against your credit score as well as his. In regards to this issue, if you are going to help your child with a purchase and you hope to buy a new home for yourself, your income must be sufficient while including this new debt or you should plan to delay your own purchase for another 12 months. If you’re absolutely going to purchase within the next 12 months, consult with a lender to make sure he has a product that will be able to support both new mortgages.
4. On another note that in a way reverses the above point, what if you don’t show enough income for your new purchase? Perhaps you’ve retired or you’ve scaled back your work and as a result you don’t qualify. As parents we always see our role as the provider for children but as we age we start to see the role reversal. Whereas I used to handle all the travel plans, now I can relax as my daughter makes all the arrangements and I just have to follow along. Many of our children have become very successful and not only don’t need our assistance but in some cases might actually be able to provide help to their parents.
In a situation where a parent needs a cosigner I have seen a number of children help their parents. It can be uncomfortable for a parent to ask for such assistance, but it can also be a tremendous learning opportunity. In many cases where customers have gone this route, the children appreciate the opportunity to help their parents. It’s a possible solution to consider if it’s the only way to get approved or if without such assistance, the interest rate is prohibitively expensive.
5. I’d like to finish up with the decision between a fixed-rate mortgage and an adjustable rate. Most of us, in the past, have chosen fixed-rate mortgages because we want to rely on our payments not changing for the length of the time we are in our homes. When we bought in our 20s we expected to be in our home for a long time. However, purchasing in our later years, we may not expect to be in our homes as long. A seven-year adjustable-rate mortgage (ARM) could be a full point lower than a 30-year fixed, and if there is a good likelihood that you won’t be in the house for more than 10 years, an ARM may be an option. We have different needs as a 65-year-old than as a 30-year-old, and these different needs and objectives can determine the type of mortgage product that makes more sense.
So as you see, there are important issues to consider as you plan your next-stage purchase. An early discussion is worthwhile, whether you’re buying your first home or your first next-stage home. Please reach out to discuss your plans sooner rather than later, to help make your process smoother and less stressful.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply.
David Siegel is a vice president of Mortgage Lending with Guaranteed Rate Affinity (GRA), a leading national retail mortgage lender. GRA is licensed in all U.S. states except Hawaii, and works with many investors, which allows it to provide competitive pricing and a broad channel of unique options to handle the often very specific needs of the community. David has over 15 years of experience at both major banks and mortgage bankers and understands the guidelines of different lenders to help direct his customers to the best loan type for their needs. No one lender is the best option for everyone. David will help you find the right choice for you. He is located at 16 Arcadian Avenue 3rd Floor, Unit C-6, Paramus, NJ 07652. Contact him via email [email protected] or phone 201-725-9527. NMLS 277243 Guaranteed Rate Affinity NMLS 1598647 Equal Housing Lender.
For licensing, go to nmlsconsumeraccess.org, 16 Arcadian Avenue, 3rd Floor, Unit C-6, Paramus, NJ 07652. Licensed by the New Jersey Department of Banking and Insurance.