Key Takeaways
Early retirees with limited income can still compete in today’s frenzied housing market.
Don’t overlook the option of renting if you’re in a transition stage of life.
Run the numbers carefully before refinancing. Keep the long view in mind.
In Part 1 of this post, we explored causes for this red-hot seller’s market, as well as how buyers with mortgages and contingencies can compete against all cash offers. Here we’ll explore more options for buyers carrying two homes, the advantages of renting and how early retirees with limited income can still find a great home without severe financial strain.
Q: What can buyers to do ease the stress of carrying two homes simultaneously? TH: One strategy I’ve used in this market is to list your home for sale first. If you must make an offer on a new home contingent on the sale of your current home, you’ll be in better position if you can demonstrate that your current house is already under contract to sell. You can specifically ask a prospective buyer to agree to an extended or open closing date, contingent on you finding suitable housing.
I’ve also had clients sell their homes by negotiating a “use and occupancy” agreement with the buyer. That means after closing, they rent back their home from their buyer for an extended period of time. Once the house is sold, the buyer will receive the cash, which can be used as a down payment on their next home. What I like about the use and occupancy agreement is that the seller can now make an offer on a new home without needing a home sale contingency on their old home.
Q: Let’s talk more about the risk of carrying two homes? Is it necessarily a bad thing?
TH: This situation brings its own risk and stress of course. It raises the classic question: “What if I can’t find a new home quick enough?”
RAD: Owning two homes (even for a short time) can be risky. If you are unable to sell your current home, you could be stuck paying two mortgages for some time. Unexpected repairs or damage can occur at any time on either property. Inspections can bring up expensive issues on your own home that you were not aware of. Generally, we don’t recommend going this route due to all the unknowns. But if a client is set on carrying two homes for a while, we can work with them to ensure they are prepared.
Q: Let’s say an early retiree—too young for Social Security--is looking to buy a new home and needs a mortgage. If they have no reportable income, do they have options?
RAD: If they have assets in a retirement account, there are strategies we can implement to help them qualify for a new mortgage. We would want to work with their mortgage broker to ensure that this strategy is implemented correctly.
TH: To echo Ryan’s comment, as long as someone is old enough to take retirement distributions without penalty, we can “manufacture” draws to be used as income. There is a calculation involved to determine the maximum allowable draw permitted given the size of the retirement account. Q: How about for early retirees with limited reportable income?
TH: A little known strategy permitted by Fannie Mae is for the buyer to purchase a home for their parent(s) under “primary home terms.” This means thee can put down as little as 5%, with primary home interest rate pricing provided they can demonstrate that their parent(s) have insufficient income to qualify for a mortgage on their own. This income insufficient can by verified from the parents’ tax returns. In other words, they can buy a home for the parent(s) without the parents being an applicant on the loan. That way, they will get the most attractive terms available, since the loan is still classified as a primary home (despite the fact they won’t live there themselves).
Q: What about renting? Is that a viable option for people looking to move soon?
RAD: Yes! We advise clients to rent all the time. Many new retirees are looking to move for tax reasons, to be closer to their families, or to explore different parts of the country. A short-term rental can act as a transition point as they figure out where they’d like to live next. The last thing we want to see is someone buy a house in a different part of the country, then discover they hate the area and move again shortly after. Renting allows them to get a feel for new areas and see if they can truly see themselves living there long-term.
TH: I agree with Ryan. Renting is always a great option when you’re in transition. It gives you time to plan where you’d like to live long-term. It removes the risk of having to manage costly home repairs. It allows you to be nimble if you decide to travel or relocate for work. Best of all, renting does not require a large cash down payment like buying a home does.
Q: What about homeowners with mortgages? Is now still a good time to refinance?
RAD: It depends on the homeowner. It’s true that interest rates on fixed-rate mortgages have been at record lows. Now might be a good time to lower your monthly payments, assuming you plan to stay in the home for a while. But refinancing also depends on the size of your loan, how far into the loan you are and what your current rate is. If refinancing is something you are considering, we are happy to review with you.
TH: As Ryan noted, you should really do a thorough cost/benefit analysis before refinancing. For instance, is your objective to shorten the term of the loan, to reduce the interest rate and monthly payments, to increase monthly cash flow, or to take cash out so you can put it to use elsewhere? You need to assess all the costs to determine if refinancing makes sense long-term. The most common type of mortgage refinance is a “Rate+Term” refinance. This loan is designed to lower the rate and reduce the payment. But if the costs don’t justify the savings (as measured by the breakeven period), you should shy away. Refinancing also allows you to bake in the closing costs for your loan so you don’t have to pay out of pocket. But this “convenience” can fool many people into making poor decisions.
Conclusion If you or someone close to you has concerns about buying or selling a home in today’s competitive market, please don’t hesitate to reach out. We’re happy to help.