Tax filings mistakes can wreck your chances at establishing that mortgage you need for your dream or retirement home. In the previous two blogs I wrote about the pitfalls surrounding self-employed tax filing blunders however there are common tax blunders that this Houston mortgage broker finds often among retirees. Retirees listen up, just because you have a lot of savings does not mean you will get that mortgage. Read on and make sure you do not fall victim to one of the biggest pitfalls I see riterees commit.
Retiring without declaring IRA distributions / Pensions / annuities
When you retire, especially if you retire with significant assets, you find yourself in a very comfortable situation. You look back on the years of toile it took to get here. You pat yourself on the back and think it was worth it. You have retirement savings of well over $300k, $400k or more. Your financial planner is busy making sure your portfolio is fully invested, bringing you home steady returns of 6 - 8% annually. Now you are thinking about buying that new and hopefully final easy-living condo allowing you relax in style. Your financial advisor smartly advises you to take out a mortgage to allow for good asset management. The condo is worth a measly $320k, a mere 1/2 of your total retirement savings, your credit is great, you have not missed a payment in the past 10yrs and your work history for the past 25yrs is impeccable, sporting past titles such as vice-president, and president of several large multi-national companies. Getting that mortgage, that you could easily payoff in cash with a single phone call to the bank, should be a cinch, right? Wrong.
Today's underwriting guidelines pay very little attention to the amount of assets you have, especially if they are illiquid ones held in retirement accounts. Instead, the majority of the approval of a modern mortgage lays in your ability to prove INCOME and your ability to repay the loan. Therein lays the problem. If you are retired there is no income. This is where most of my clients in this situation say "well if I had to Dan, I could just payoff the mortgage in cash". But remember, the underwriter is not interested in your ability to extinguish the mortgage, they are interested in your ability to service it.
So, there is no financing for retirees? Not necessarily. Quite often retirees draw social security and many baby-boomers have pensions. Both of these can be counted as underwritable income. However, it is typical that either the combination of both or a lack of a pension lead to not enough income on paper to qualify for that mortgage.
So what can you do about this? Start taking monthly distributions. Establish stable monthly distributions from your IRA, pensions and or annuities in the same amount and make sure its not discretionary. In other words, you do not have call in the order once a monthly but rather there is a stipulated amount sent every month to you. What the underwriter is going to be looking for to qualify this distribution as income will be a PAST history of you earning the income, PRESENT evidence of your earning the income and your FUTURE ability to earn the income. So if you establish a stable (non-discretionary) pattern of receiving distributions from your IRA, Pension or annuities into a liquid account, say your checking account, for a least 1yr, prove that you are currently receiving this distribution, and prove your financial wherewithal to continue the distribution into the future, the underwriter will probably grant this as income.
Now, here's the kicker. If you fail to declare the distributions on your taxes the underwriter will most likely disallow the income altogether. On rare occasion, I have been able to qualify distribution income without tax filings and with as little as 2 months of distributions. But take my advice, do not wait until the last minute. Start that monthly distribution and declare the distribution on your taxes. You will be happy you listened to this Houston mortgage broker.