Art Alvarez explains how buyers with substantial assets but little income can qualify for mortgages. Lenders can convert investment balances into assumed monthly income by dividing ~70% of the balance by 60-84 months. Reverse mortgages work for seniors; asset depletion programs work for younger buyers.
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So I'm here with Art Alvarez of Mortgage Works, and I just have a question, Art. You know, a lot of times, especially in the, in the Coachella Valley, we tend to get some, I'm going to say, unique type of people living in the desert. A lot of times they will have sold their home in other areas where it's very expensive and they have this profit from selling their home. And they come here, they want to buy a home, but maybe it still needs financing. Or they're, you know, they're still of that age where it's like, you know, 45, 50 years old. They're not retired yet. And then you also have those other people who say, hey, I want to retire to desert because it's so ideal, but they really don't have that steady income. Is it make that challenge for them? And if it is, how can you help them with that?
Yes, Jeff, you're right. We do get buyers that come out here to the Coachella Valley. In fact, frankly, all over California, I've run into this where you'll have somebody who has a great deal of liquid assets. It could be someone who just sold another property looking to move here, but they're not really, they're not of retirement age. And yet they may have, you know, not real steady income or pretty minimal income. Another option or scenario would be someone who maybe inherited a bunch of money from family. And again, their employment history, their recurring monthly income is not that substantial. And then of course, another case is somebody who has sold their home, but they're a senior homeowner looking to be a buyer here in the Coachella Valley, but again, have limited income income to meet the conforming guidelines of calculating a debt to income ratio. So the question becomes, how do we help those kind of folks who still need financing to complete a purchase out here? Well, if it's a senior borrower who has sold another property, they're moving here to permanently move as a resident here in the Coachella Valley. The most obvious solution there is a reverse mortgage. The qualification for those is entirely different than a conforming loan. You're not qualified based on debt to income ratio. You're qualified based on financial assessment, but your liquid assets can be a big factor in getting you approved for that option. And of course, when you get a reverse mortgage for purchase, you don't have monthly payments. The more challenging scenario is someone who's not a retirement age, but again, has a large amount of money to buy a home, but still needs some financing involved in that purchase. And again, they are Limited in terms of monthly income, employment history and so forth. So the way we can handle that is through a concept known as asset depletion. In fact, I'm handling one right now. I pre qualified a buyer, he's in his 40s, has a substantial amount of liquid assets. He's looking to buy a home for about a million and a half. But he needs a loan amount of about 300,000 to achieve what he wants to do in terms of the purchase. What we're able to do is take one of his investment accounts that has a very high balance because it's invested in securities, stocks, bonds, etc. We do have to take a haircut that. About 70% of the balance is what we can use. And then what we do is we take that amount and divide it by, I have some lenders who will divide it by 60 months, others at 84 months, the resulting figure becomes their assumed monthly income. And then we can use that to calculate a debt to income ratio that's within the acceptable range. So that becomes a very effective way if you have large amount of assets to complete a purchase where you need financing, but you don't have that typical, you know, job history or employment, I'm sorry, employment income, that's going to help you qualify based on debt to income ratio. And the important thing to know about this is these programs are actually priced pretty well. The gentleman I'm working with now, I'm going to be able to offer him a 30 year fixed rate loan under 7%. So when you consider that this becomes a very effective way, even if you don't have that employment history and that employment income that you otherwise would need for a conforming loan. So that's how we handle that and it can work very well.
Just have one follow up question there that you say he has to take a haircut, what do you mean by that? Does it mean if he has, let's say has a million dollars in his retirement account, does that mean he loses the value of that or what do you mean by that?
No, the assumption there is that when you have a retirement account or an investment account, typically these accounts are going to be invested in stocks, mutual funds, bonds. Well of course, until such time you're actually completing the purchase, the money in that account is subject to market fluctuations. You remember not long ago when the tariff situation first entered the scene in the financial markets, we had a big correction in the stock market. Well, we have to take that into account. If your investment account that we're going to use to calculate Your assumed income is fully invested. So the haircut means if the balance is 1.5 million, we'll take, say, 30% off of that. That would be 450,000. And so then we'll use the remaining amount, then divide that by 60 or 80 to come up with your monthly income for qualifying based on debt ratios. So that simply taking into account the market risk of a change in the balance based on what happens in the stock or bond market.
And Art, does that mean now that that person has to start taking that money out of that account, or is it just a assumed monthly payment because of the value of that portfolio?
Well, that's a very good question, Jeff. In this case I'm talking about, we're calculating an assumed monthly payment. They don't actually have to take the money out. But another trick of the is maybe somebody who has a large IRA account and if they're at least of retirement age past 59 and a half, so they avoid any penalty when they take money out of their ira, of course they do have to pay tax on that. But we can use a trick where if they have a substantial IRA account, we can set up a recurring monthly distribution in an amount necessary to qualify in debt ratio for the loan amount they're requesting. I do this all the time. Every year I do a few of these. Now, what we do is you set up the monthly distribution. We have to verify that you've received at least the first monthly distribution, and then we can close your loan. And then after that, if you want to continue the monthly distribution, you can. Or if you want to stop it, you can do that, too. By that point, you've already closed on the home, you've got the loan, you're good to go. If you like more information on any of these scenarios I'm talking about, feel free to give me a call. My name is Art Alvarez at mortgageworks, where we have the answers around the house. You can call me on my cell, call me on my office line, send, send me an email or a text. I'll get back to you right away. Let's start with a conversation where I can learn your particular situation and then give you some guidance as what's going to be, what's going to be the best direction for you to.
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