Stated Income Mortgages for Retired Home Buyers
by Janet in Pikeville, Tennessee
Janet ask Kate about stated income mortgages for retired home buyers: After the financial crisis of 2008, loans that did not require verification of income suddenly became known by the media as liar loans. But gradually, they are regaining favor with financial institutions. Meet Janet, a retired home buyer, who doesn't have run-of-the mill income. Nor is she a typical stated income borrower. Let's look at her options.
Ask Kate: Traditional Lender Financing Without Employment By Janet in Pikeville, Tennessee
I'm almost 60 years of age.
I want to buy the house I live in by borrowing from a traditional mortgage lender.
I had a 2-year agreement with the owner, in writing, to go traditional by the end of that time. That will be in one year.
I have left the workforce and have a plan using my Profit Sharing money to live on until age 62. At that time, I'll sign up for Social Security.
Here's the question; do you think a bank or mortgage company will finance this house by a written financial plan in place of income?
Say, I write out my money plan using my savings (without a lien) and my eligibility for Social Security Income in 2 years, to prove that I can make the mortgage payments. It's a stretch but I really don't want to return to the workforce.
Kate's Answer: Traditional Lender Financing Without Employment
Kudos! You are not waiting until the eleventh hour to finance the house you want to buy.
But while you have income, it is not the run-of-the mill income. Neither are you a typical stated income borrower.
Because of this, you'll want to interview lenders carefully about their programs before turning over your paperwork. (More on this later.)
Income vs Stated Income Mortgage Programs
The bulk of mortgage approvals are based on hourly and salaried income. Paystubs, W2s, and IRS tax returns are used to document this type of income.
But when a borrower has a complicated financial profile, producing enough income documentation to satisfy underwriting guidelines can be cumbersome. But this doesn't mean a non-traditional borrower can't afford or won't continue to make mortgage payments.
Over the years, this category of borrower has had a better chance of approval if they applied for a mortgage that allowed them to state their income on the loan application without providing income documentation. Even so, there are some wrinkles with this type of loan that I will point out in a moment.
As a side note, many people want to know about drawbacks to a stated income program. To compensate a lender for the risk of not verifying income, the loan approval is often conditioned on some combination of larger down payments, higher interest rates, and/or additional fees. But with a strong credit history, the price of the mortgage should not be much higher than a fully documented loan.
Wrinkle 1: Fixed Income for Retirees
Okay, let's discuss the first wrinkle to no-income verifiable mortgages. Many stated income programs do not accept retired borrowers who receive the majority of their income from Social Security or an investment portfolio.
This is because lenders get jitters at the thought of their borrowers being on a fixed income. For example, if we crawled into an underwriter's head, we'd hear them thinking, 'What happens during times of inflation? Will the mortgage payment still be affordable?'
So if your loan originator suggests going with a stated income loan, immediately mention your Social Security income.
Wrinkle 2: Short-Term Income
Income used to qualify borrowers for a mortgage must be ongoing for at least 36 months after the transaction closes.
Whether or not you apply for a no-income verification loan, you could be asked about the longevity of your profit sharing income. Because it ends in two years, it will be likely be regarded as short-term income and not count toward your qualifications.
This brings us to the third wrinkle.
Wrinkle 3: Point of No Return After Income Is Reviewed
If borrowers do not qualify for a stated income loan, banks will often condition an approval on income documentation. However, borrowers can't request a stated income loan after their income documentation has been reviewed.
So make sure to discuss your limitations and qualifications with a knowledgeable loan originator before making application. You can't foresee every bump in the road to mortgage approval but these wrinkles are worth a discussion as are your options.
Further Suggestions for Getting Mortgage Loan Approval
Now that we've defined a no-income verification loan and wrinkles to watch for during the approval process, what else can you do to secure a mortgage? Don't assume a no-income verification loan will be your best option.
Although this might sound contradictory, you should leave your options open while you interview loan originators
who are experienced in helping retirees get mortgages. In your case, this is highly important because your financial situation, although thoughtfully planned out, is not cookie cutter. You have fixed income, future income, and short-term income.
So you are going to need to set yourself apart from the rest of the borrowers who are applying alongside you. First of all, that means paying attention to filling out every box on the loan application. Thoroughly.
Whatever the required documentation, make sure you supply it promptly. Every last page.
Then write letters of explanation to accompany the documentation so the underwriter does not struggle to understand how you are going to pay back the mortgage.
I also suggest pointing out how long you have already lived in the home. Underwriters know the more financially and emotionally vested a borrower is in a home, the less likely a foreclosure when finances happen to get stretched.
As I said, there are no guarantees to loan approval. But by being thorough and conscientious, you take the best shot at financing your home.
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