So you’re retired. And now you want to buy a house without paying cash?
Yes, that is doable.
Asset Backed Mortgages
A typical bank wants to see predictable income in order to lend money. I suppose the logic is that if you get paid regularly then you will pay them regularly (actually, you will pay the company they sell the mortgage to.) These same banks will lend money to the self-employed but with more hoops to jump through to insure the income is “safe.”
So what about people who don’t have jobs of any kind, but happen to have a giant pile of money lying around, e.g. IRAs, 401ks, brokerage accounts, etc…?
That’s a situation that many banks just Can’t Even.
Bank – “Oh my, it appears you could pay cash for this house but our brain has short-circuited and we are unable to figure any of this out…. DENIED, DENIED, DENIED, ………
Which is weird… why would you rather lend money to somebody with a “good credit score” but spending 100% of their after-tax income vs somebody who could sell some stock and pay for a house 4 or 5 times over?
If this sounds frustratingly familiar, there are some banks who offer Asset Backed Mortgages or Asset Based Mortgages. As the name implies, instead of income they look at assets.
Schwab and Rocket Mortgage
When I started looking for non-traditional lending, the first and most prominent name I found was Schwab. They offer asset backed mortgages via Rocket Mortgage (formerly Quicken Loans.) The loans are fixed fee and applicants are assigned a mortgage broker who works exclusively with Schwab customers.
As a bonus, they recognize that asset-heavy households are lower risk on mortgage default… and interest rates reflect that. You can get as much as a 1% interest rate discount!
When I applied the turnaround time was quick – I had a phone call with my assigned broker within a day and a pre-approval letter by the next morning.
I simply explained that I wanted a ~$1 million mortgage and I was looking at homes in the range of $1.5 million. The broker can see the assets in your Schwab account so it is all very seamless. (At the time of application, my Schwab account had about $100 in it.)
Because you are working with Rocket Mortgage, you have access to all loan types (interest only, ARMs, 15-year, 30-year, etc…) and the rates are as competitive as you might expect from a major mortgage provider.
I tried to explore deeper – how much total could I borrow? Is there a formula that determines this? Are assets in the brokerage account weighed differently than assets in retirement accounts? Etc… but my broker was not interested in anything except a sale. “Let me know when you have an accepted offer.”
I even blasted over an older article from when another early retiree was trying to buy a home (Getting a Mortgage When You Have Assets but No Income) because it explained a formula (basically the Freddie Mac asset depletion mortgage formula.)
Me: “Is this how it works?”
I mean, I respect that the guy didn’t want to answer a bunch of questions without getting paid, but ultimately that was why I got a mortgage elsewhere. Sorry.
If anybody has more details on how this works, please comment below and I’ll update the post.
Freddie Mac Asset Depletion Mortgage
For awhile now (not sure how long), Freddie Mac has outlined an alternative to income based mortgages. Then late 2020 they updated this guidance. This is important because in many cases a mortgage companies entire business is just creating loans and selling them to Freddie Mac – The sole criteria for these companies is, “will FM buy it?”
The asset depletion mortgage goes like this – take 100% of your brokerage account minus home down payment and 70% of your retirement accounts and divide over the life of the loan (e.g. 360 month in a 30-year loan.) This is your “income.”
Now apply debt-to-income requirements (50% max for Freddie, lender may have tighter requirements) and you get your maximum mortgage payment (encompassing P&I, taxes, insurance, HOA, etc…)
From there you can reverse determine the maximum mortgage amount factoring in the FM required 20% down payment.
$1 million brokerage + 70% * $1 million IRA = $1.7 million
1.7 million / 360 = $4,722 monthly “income”
50% max debt-to-income = $2,361 mortgage payment
Now, reverse calculate the taxes and insurance, work through the amortization, carry the one, and we get… a house purchase price of ~$550,000 with a mortgage of ~$440,000. (2.75% 30-year fixed)
Or a home purchase of ~25% of total liquid net worth.
(Nice, but it’s a strange assumption that the underlying portfolio is expected to return 0% real over 30 years.)
In any case, based on Freddie’s guidance more lenders should be able to offer mortgages to the non-working members of society.
If in doubt, ask. “I want an asset depletion mortgage. I have a lot of assets but little/no income.”
We paid cash for our house and then immediately refinanced to pull money out. Yeah, it’s weird.
Special note: you can’t do a (large) cash-out refinance as a Freddie Mac defined asset depletion mortgage. Purchase or traditional refinance only…
I started with Schwab / Rocket Mortgage but ended up with a random lender off of Bankrate’s refinance page. Or should I say, 6 random lenders.
I negotiated through 6 loan estimates before asking the best two to go head-to-head before signing an agreement with the winner.
This turned out to be a 2.75% 30-year fixed with total out-of-pocket fees of ~$0 (thanks to $3,000 in “Lender Credits”) and no escrow.
I’m not completely sure on what basis our mortgage was approved – I reported income equal to what is on our 1040 from the past 2 year (2019 and 2020, includes investment income and Schedule C) and had to provide extensive documentation on both blog income and assets / brokerage accounts.
I’m now working on a refinance to a 15-year fixed and will probably get at least $1,000 cash in my pocket for doing so.
For those of us who have chosen Leisure over Labor it is still possible to get a mortgage – no job or self-employment income required.
Companies like Schwab / Rocket Mortgage will provide asset backed loans. They will even provide a discounted interest rate. With Freddie Mac’s blessing, other lenders provide asset depletion mortgages based on expected “income” from an investment portfolio.
No matter which lender you go through it pays to get multiple loan estimates and ask brokers to compete for your business. After all, they are just going to sell it – there is no long term relationship here.
Best of luck getting your asset based mortgage – you’ve earned it.