1

I'd like to move to a new home and would like to finance it via a loan. My current home is worth ~$285,000 according to internet and my current home loan balance is ~$100K.

My financial situation is the following: I am 55 yo; retired; net wealth ~= $2MM (including ~$200K in savings, ~1.75MM in investments, and other assets like house & car); yearly investment income ~= $25K a year; no significant or unusual liabilities; and an 800+ credit score.

Is it reasonable to expect I would qualify for a loan with typically favorable terms (e.g. no points, better/best available going rates, etc.) with most lenders? My primary concern is being dinged for not having an actual job-related income at my age, and I'd rather not apply if it is unlikely to be approved as it tends to decrease ones credit score.

  • 2
    What purchase price (or range) are you looking at? How much of it do you want to finance/how much of a down payment do you plan to provide? Will you be selling your current home? Why are you concerned about credit score? – yoozer8 Jun 26 '18 at 18:42
  • @yoozer: A1: Not determined, yet; I am only just starting the thought/investigative process, but will probably buy more with location and square footage in mind and pay whatever I can negotiate. Most likely will be in the $200-$250K range, though, as I am looking to get away from an overcrowded metro area. A2: Very possibly will use most/all equity in current home to make down payment...might depend on what tax rate I would pay on portion of home sale not rolled over into a new home. So potentially financed part would be in the $100-$150K range. – mblatz01 Jun 26 '18 at 22:09
  • @yoozer: A3: Yes. A4: Because you don't get an 800+ credit score without always being concerned about your credit score...right? :-) – mblatz01 Jun 26 '18 at 22:10
3

Addressing the drop-in-credit-score item - as noted in another answer, the FICO scoring model treats multiple score pulls within a short period of time for a particular purpose as a single pull. They expect you to be shopping around for a loan on a large purchase such as a car or house. That said, the credit pull will likely cause a drop of between 5 and 10 points on your score, for between one and two years. This drop is insignificant on a credit score in the 800+ range, and any credit score is insignificant if you do not need to apply for new credit.

As a side note, the FICO model is not one single model, but several which are optimized for particular types of lenders. You might have a different score for a home mortgage, car loan, and credit card, for instance.

As for whether you would be approved for a loan - well, the underwriting guidelines will differ between institutions, but overall the determining factors are "credit-worthiness" and "ability to repay". Your 800+ FICO score implies good credit-worthiness. Your ability to pay is determined principally by your income and by your debt-to-income ratio. Since you say you have an outstanding mortgage of $100k and only note yearly income of $25k, the odds are that your debt-to-income ratio will not look good. Assuming your current mortgage payment is based on a 30-year loan for $200k, you are looking at a ~$1000/month payment exclusive of interest, taxes, and insurance, which is about 50% of your monthly take-home before considering regular expenses or other debt. A debt-to-income ratio of 36% or 43% is typically the ceiling for mortgages (depending on pre-tax or post-tax numbers). You are not yet qualified for Social Security or most pensions, and cannot touch 401k or IRA assets without high tax penalties (or special circumstances) so if, as I suspect, a large portion of your assets are tied up in such funds, they do you little good in this case.

You have the enviable position of having a large pool of assets. This does change your situation, but those assets are not encumbered in any way. You could, should you so choose, give them away, sell them, lose them gambling, or (in the case of the investments) lose them simply in a market crash. Unless you pledge some of those assets as surety for the mortgage debt (thus putting a lien on the property) or you have additional income beyond what you have specified from investments, your approval chances are lower than you might like - depending on the size of the mortgage you wish to take out and whether you actually sell your current home (eliminating that debt) before buying the new one (mortgage closings can be structured to account for this - it is very common).

You can probably find a lender who is willing to work with you - your asset accumulation is sufficient to demonstrate financial stability. As suggested above, this may involve a higher down-payment, partially securing the loan with other property, or some other financial arrangement.

You may find it better to pay for your new home outright and consider a HELOC if you need. This would have the alternate effect of reducing your yearly investment income, which may not be something you can live with. Conversely, that may be offset by the elimination of your current mortgage debt.

  • 2
    "and any credit score is insignificant if you do not need to apply for new credit." This really is the key line - no need to worry about a credit score if you don't want to borrow. So no risk to it dropping a few points from asking around for mortgage rates. – Grade 'Eh' Bacon Jun 26 '18 at 20:26
  • You are correct, much of my assets are in retirement accounts. Considering HELOC is a good idea...thanks. – mblatz01 Jun 26 '18 at 22:12
1

The bottom line is that your information is dated about multiple mortgage inquiries causing a drop in credit score. See the first Q&A on the FICO site.

So you could apply for mortgages with impunity and not receive a "ding" on your score.

It would probably be better for you to apply with a lender that you already have a relationship with. Perhaps the organization who holds your mortgage now or the bank(s)/brokerage(s) who holds your mortgage now. When you are talking about your level of stated assets, bankers are happy to spend some time with you.

Keep in mind that most advantages of having a mortgage have disappeared. You would probably be better off just buying the home for cash. What is your average rate of return? The arbitrage between the average rate of return 7%, and prevailing mortgage rates continues to decline. As of this writing a 30 year fixed is 4.8, and a 15 year 4.4. Is it really worth it?

You stated that your investment income is 25k, on a portfolio of 1.75m, that only amounts to 1.4% return. In that case you are far better off not having a mortgage with just the math!

Additionally, the new tax policy all but eliminates the interest rate deduction. Why play that game?

In your shoes, I would just buy the house for cash.

  • 2
    It is likely that a large portion of the OP's "investment assets" are not actively providing income if they are tied up in 401k or IRA accounts; the assets exist but the earnings are not available without significant penalty. This would account for the unusually low return you cite. Conversely, the OP may simply be incredibly risk-averse and be invested in cash or safe bond funds. – Istanari Jun 26 '18 at 19:54
  • Good point about upcoming/new tax policy. My avg Rate of Return over 1, 2, and 5 years is significant above 7%, according to my brokerage that is, so the gap between that and mortgage rate would be a significant factor for me, but definitely a worthy consideration in this decision. Checking with my current lender first would be smart. It is just so hard to get a hold of anyone but typical customer service "bullet-stopper" nowadays. – mblatz01 Jun 27 '18 at 0:22
  • 1
    Chase will allow you to talk to a banker without being a client, just show up and wait a bit. Go during slow times and the wait will be lower. – Pete B. Jun 27 '18 at 12:59

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.