Do you worry that because you don’t have an income or a steady income that you can’t qualify for a mortgage? Maybe you live off your assets, but don’t think a mortgage lender will qualify you based on this money.
We have good news – there is a way to use your assets as a way to qualify for a mortgage. The process works a little different from the standard mortgage because the lender has to make sure you have enough income to cover the mortgage over its lifetime.
Read below to see just how you can get approved using your nest egg alone.
Figure Out Your Assets
First, you’ll need to total up your assets. You can include all accounts that you are fully vested in and can easily use without penalty. For example, if you aren’t retirement age yet, you can’t use your IRA or 401K as a source because you will pay a penalty for early withdrawal. If you are of retirement age, though, you can include these accounts in your figure.
Take a Percentage of Your Assets
Once you know your total assets, you must take 70% of that number. Why must you take 70% of it? This accounts for any taxes or other obligations you must pay on the income. If the lender used 100% of the amount, they might over qualify you for a mortgage.
For example, if you have $1,200,000 in assets, you can use $840,000 as your total for qualifying purposes.
Figure Out the Down Payment and Closing Costs
Next, you must figure out the total of your down payment and closing costs. You’ll need to think of each of the following costs:
- Down payment (the amount will vary by lender and loan program requirements)
- Closing costs (origination fees, underwriting, closing fees, title insurance, and attorney fees)
- Prepaid interest (any interest you owe prior to the first payment that you must pay at closing)
- Prepaid taxes (any taxes you have to pay upfront or set aside in an escrow account)
- Prepaid homeowner’s insurance (you will likely pay 12 months of insurance premium at the closing plus money to set up an escrow account)
Take the total amount of these costs and deduct the total from your total assets.
Figuring Out Your Monthly Income
The last step is to figure out your monthly income. With the above number (total assets x 70% – total closing costs), you then divide the number by 360 months. This is the maximum income a lender can use for qualifying purposes.
Here’s an example using the $1,200,000 in assets and $10,000 in loan costs.
$1,200,000 x .70 = $840,000
$840,000 – $10,000 = $830,000
$830,000/360 = $2,305 monthly income
The lender must then use the $2,305 figure to determine how much loan you can afford. The typical housing ratio is 28% of your gross monthly income and the total debt ratio is 36%. Some lenders will allow slightly higher ratios, but it depends on your circumstances.
As you can see, using your assets may not qualify you for the largest loan, but if you are retired, do you really want a large loan in the first place? It can be just enough to get you into a smaller home or to provide the gap income you need to help you qualify for a mortgage if you live off social security or pension income.
Lenders don’t usually advertise asset-based loans or readily approve them, so you may have to shop around. First, make sure the loan is in your best interest, though. Does it make sense to take out the loan? Will you be able to comfortably afford the payments and your other monthly obligations? If so, this loan program can offer you the flexibility you need to secure a mortgage.