There is a bonanza of attractive retirement homes available to Baby Boomers at bargain prices. Making “lemonade out of lemons,” many Boomers are seeking to take advantage of the foreclosure market to purchase a retirement home that was unaffordable just a few years ago. But because of restrictions put into place to counter “buy and bail” abuses, they are finding it difficult to get a new loan when they intend to convert their current home to a rental property because they cannot sell it in this abysmal real estate market.
Because so many buyers who are upside down on their mortgages were qualifying for new home loans by producing bogus rental agreements on their current residence and then walking away form the old mortgage once their new home closed, lenders have implemented stricter loan qualification rules to prevent this practice.
Fannie Mae and Freddie Mac underwriters now require that buyers qualify on the mortgages for both homes. To get a new loan, buyers must have a 30 percent equity (25% for Fannie Mae) in the property that is to be rented and a valid 12-month lease (with security deposit) to be able to use 75 percent of the rental income from the old home. And up to a two-month mortgage reserve (on both properties) may be required. If this criteria cannot be satisfied, then borrowers must qualify for both homes, have a valid 12-month lease (with security deposit), and six months in reserves for both mortgages. Plus, rental income cannot be used to qualify for the new loan.
FHA-insured loans now require a 25 percent equity stake in the property to be rented (along with a valid rental agreement and verified security deposit), but do not impose reserve requirements. Regardless of which organization is backing a loan, qualifying income and assets are closely scrutinized and must be well documented. And of course a decent credit score is a must.
Thus, Boomers planning to rent out their current residence and buy a bank-owned property have to first obtain a legitimate one-year rental agreement for their current home. Typically, this involves moving to an interim residence and possibly placing some household goods into storage before getting a lease on their now vacant home. And if they are upside down on the equity in their former home, their income has to be sufficient to qualify for both properties. Moreover, they will likely be required to set aside six months of reserves to cover both mortgages…and that is a big chunk of money that Boomers seeking to retire will not have access to for a long time.
Of course, one way to circumvent these onerous loan hurdles is to pay all cash for a new retirement home. Those who have paid off the mortgage on their current home can sell it (a big “maybe” in today’s market) and use the proceeds to buy a new home. Or, they can possibly take out equity to pay cash for a new home. Many Boomers also have retirement savings that can be tapped to make an all-cash purchase. These lucky few enjoy a formidable advantage – who cares if you rent your old home at a break-even situation or even a negative cash flow if you don’t have to satisfy underwriters?!
But what about the majority of Baby Boomers who have seen their retirement savings sliced by 50 percent or more and their home equity evaporate? Are they out of luck? Not necessarily, but they will have to work harder to finance a bargain retirement home. Here are some avenues for Boomers to explore:
- Many homes will be able to generate a positive rental cash flow even if the mortgage is upside down. Check the rental demand in your area by talking to local property management firms and rental agencies, then do the math to see if you can buy a desired retirement home based on qualifying for both properties.
- If you can put up a large down payment on the new property, you may be able to get a private investor to come up with the balance and essentially buy the property “for cash.” Investors figure you’re not going to bail on the new residence if you have large equity stake in it.
- A local lender who retains loans rather than reselling them may have less strenuous qualification requirements, especially if you place a down payment on the new property of 30 percent or more.
- Look into new 40- and 50-year or interest-only loans that offer lower payments and possibly more lenient qualifying criteria. Just be prepared for the balloon payments or rate adjustments that usually accompany these loans.
- You could do a loan-free 1031 exchange with someone who has a house you like and wishes to move to your current location.
- Get your grown kids to help you come up with an all-cash offer.
- Look into offering your current home under a “lease/purchase” option to entice renters and boost rental income. Here, the renter typically pays more each month to build up a down payment that allows them to purchase your old residence at either a pre-agreed price or current market value at the time of sale.
- See if your current lender will reduce the principal and/or interest rate on your mortgage to make your financial profile more appealing when applying for a loan on a new retirement home.
- If you have rented out your old residence for at least six months, it could qualify as an investment property and you can avoid “buy and bail” qualifying restrictions in acquiring a new loan! In some cases, it may pay to rent your new home (perhaps under a lease/purchase option) or live in an interim residence for six or more months to enjoy more lenient underwriting.
Other avenues to explore are:
- New home developers eager to unload inventory may have “buy downs” and other financial programs that circumvent or alleviate tradition loan qualification criteria.
- Lenders are becoming more open to “short sales” as the financial crisis deepens. See if your lender will work with you to unload your upside-down property in a fashion that doesn’t damage your credit score, thereby allowing you to later qualify for a new loan on a retirement property.
- Find a knowledgeable Realtor who will work with you as a “buyer agent” to help you negotiate a good deal and run interference with lenders.
- Some areas of the country offer special financing from local lenders or civic government to entice Baby Boomers looking for retirement homes.
- You could just rent a new retirement home and retain your cash reserves for emergency funds, market investments, etc. Then, what you do with your old home is then up to you – sell or rent it out, or just walk away from a hopelessly upside down loan.
- If you are a veteran, check into VA and special state loan qualification programs. They may be able to help you or offer suggestions.
Just a note on bailing on your existing mortgage – avoid this action unless you have no other choice. There are lingering consequences, including the inability to get a new loan for 4-5 years and possible legal actions. Although there are loan qualification hurdles for most Baby Boomers seeking to buy retirement homes at today’s bargain prices, don’t give up. Talk to a knowledgeable mortgage broker, loan officer or Realtor to see what options are available. One thing Boomers have learned over the years is that if you are persistent, there is usually a way to make something happen. And there has never been a better time to do buy – the foreclosure market presents a rare opportunity to retire in a home that was previously was out of financial reach for most Boomers.