Good morning! Today I have a guest post from William Cowie from over at Bite the Bullet Investing and Drop Dead Money *I need to know how people can find enough hours in the day to run multiple blogs!*. He also offers a free course on the basics of investing to anyone who didn’t think they could invest.
William spent a lifetime in senior management of various businesses and acquired several academic credentials along the way. Now he enjoys writing and blogging about overcoming the fear of investing (Bite the Bullet Investing) and benefiting from the economy (Drop Dead Money). You can find him on Twitter or Facebook.
Imagine the big day: you reached your goal and you’re finally retiring (at the age of your own choosing).
Nice!
One of the first things you do is put your home on the market and start looking for the perfect place to spend your free years.
Whoa! Not so fast!
Caution
Before you throw that big party, there’s one change in the financial landscape you need to be aware of, and it’s not a trivial one.
Remember the housing fling of the mid to late 2000’s? You know, the one where you winked at the loan officer about your income, and she winked right back and approved your application? The one that came crashing down around our ears a few years later, with unemployment and taxpayer bailouts to keep those high rolling Wall Street execs employed and their mortgages in the Hamptons current?
Yep, that fling. One aspect of it has led to a change as part of the bailouts Congress crafted to protect you.
Protected By Congress
In school, when we paid attention we learned that we the people are the true bosses of Congress, and one of their jobs is to protect us. No offense, but the writers of those text books never met the million dollar banking lobbyists, who rule Congress with a golden fist. Lest you think that’s just gratuitous mudslinging, please allow Charles Keating to back that up. He’s the guy whose Savings and Loan, Lincoln, had as its sales motto: “And always remember: the weak, meek and ignorant are always good targets.”
This was not said lightly. Mr. Keating was very aware that practices stemming from that attitude might well be unethical, if not illegal. To keep those predatory practices off the radar of the regulators (you know, the folks hired to protect us) he bribed five senior senators of influence and stature, who became known as the Keating Five. It worked. The regulators wanted to shut Lincoln down, but the Keating Five stopped them. And taxpayers paid the bill with the Resolution Trust Company, the forerunner of our trillion dollar bailouts.
When asked about his large political contributions, Charles Keating’s response famously was, “One question, among many raised in recent weeks, had to do with whether my financial support in any way influenced several political figures to take up my cause. I want to say in the most forceful way I can: I certainly hope so!”
Don’t let the humor in any of the above fool you — everything stated is factually accurate. (You can look it up easily enough.) That all happened in the 1980s, almost 30 years ago. In the meantime, lobbying has become much more sophisticated, refined, pervasive… and therefore irresistible by politicians of every stripe.
No, this post isn’t about the hijacking of our democracy by lobbyist money. Well, not totally. It’s about the impact those shenanigans are having on your personal finances.
What Impact?
In this particular case, it’s the issue of income verification during the home loan application process. Winking, you see, is no longer allowed when it comes to verifying your income.
Well, you might shrug, how can that be so bad? Isn’t this what should have been happening all along? Why all the bile aimed at our innocent and honest politicians?
It’s the way in which it’s being done, and the thick rulebook now in place, a rulebook you’ll run into on the happy day when you retire (whatever happy thing that means for you) and apply for a home loan. CNBC had a good article recently about a man with a $1 million investment portfolio wanting to put down a 40% down payment, who applied for a $170,000 home loan.
It was denied.
Seems he needed several years of proof of dividends to verify his income, along with assurances that those dividends will continue. You don’t need to show a guarantee that your employer will keep you on past the date of approval, but you have to pretty much guarantee your dividends will continue.
And that, as anybody who is not even close to retirement knows, is hard to do, if not impossible.
Bam! Kiss goodbye the American dream of owning your own home when you retire, at least if you had any hope of doing that with a mortgage… even a modest one.
If you step back and think about it, the new, tougher home loan qualifying process is more about protecting banks from themselves and each other than it is about protecting us. This is like those major sports leagues where the owners restrict player pay scales in a collective bargaining agreement, because they are too undisciplined and greedy to behave with common sense individually.
And so the main reason for the strict new provision requiring verification in triplicate of every pay stub you ever received since kindergarten is so that Wells Fargo won’t lose a home loan to Bank of America because the BofA loan officer gets a nervous tick in one eye.
What Do You Do?
1. Be Aware
If you are contemplating retirement, whether at the “normal” age, or an earlier age you have targeted, just be aware of the strict new income verification requirements. Forewarned is forearmed.
2. Get Out Of Debt
If you can buy your retirement home with cash, you won’t have this problem. To me, this is the best motivation imaginable to pay off your mortgage, low interest or not.
If you were leaning toward an earlier retirement because you figured your income from side hustles and dividends will be enough, it may be better to wait a little longer and take care of the debt situation totally.
3. Buy The New House Before You Retire
I know, it’s one of the anomalies of the system: they’ll lend you money based on the wages you made the last 2-3 years. If you get laid off the day after you move in, or simply decide you like your place so much you don’t want to go in to work anymore, the bank is fine… as long as you keep making those payments. But they are much more nervous if you have proven that you know how to invest and have built up a sizable next egg, but you aren’t earning a set wage anymore.
But, the system is what it is. And so, if you have plans to retire and move, buy the new home while you’re still employed. It won’t be a total slam dunk, because of the move, but it will go better than if you show up already retired.
Conclusion
It seems to me getting out of debt is just the simplest way around this issue. Of course, that’s a lot easier said than done.
But, what do you say? What will you do when you reach your goal of financial independence?
Photo credit: watcharakun/freedigitalphotos.net
I don’t understand why people wait until retirement to move somewhere else they would rather be? Why not do it now and rent out your existing place – that is what I plan to do in the coming 1-2 years.
“*I need to know how people can find enough hours in the day to run multiple blogs!*” Yes me too!
I think getting out of of debt before retirement is a no-brainer, though I do know retired folks who have a 30 year mortgage (they could easily pay off the entire thing if they wanted to but would rather leverage it for investment purposes). I technically wouldn’t say they are in debt, though, because on paper they have assets that could be quickly converted if needed.
First off, “running two blogs” sounds a lot more exciting than it is. Drop Dead Money is an ultra-low frequency site, like one or two posts a quarter. That’s because it focuses on the economic cycle, which moves at a glacial pace (one cycle per decade) and I don’t believe in saying something just to say something. Because the cycle moves so slowly, people get caught out, like they did in the last recession. So DDM is pretty much just a quarterly watchdog for those who care. Because it’s such a low frequency it’s subscription-only — who can remember to go check to see if a new post is out if they only happen once every three months? So, while it’s free, you have to subscribe. Thanks for the opening for that plug! 🙂
I think getting out of debt before retiring (at whatever age, and whatever that means) is essential. It’s interesting to me that the guy in the CNBC article had a million dollars and still wanted a $170K mortgage. I guess it’s because he figured he can make more on his investment than the mortgage will cost…
I don’t understand why someone would want a mortgage in retirement. If you want to move somewhere else rent. Then if you don’t like that area you can move. It would make more sense to me to have a paid off home in retirement and then only have to worry about property taxes, insurance and utilities. I totally get the “we can invest the rest for a higher return” but usually in retirement you are in wealth preservation mode, not generation mode, so you tend to be taking less risk so the spread would most likely not be worth it. Of course maybe I was just raised in a family where what I was exposed to by my parents and grandparents.
When we bought our house it was surprisingly difficult to get the loan. When we finally got through the proof and the paperwork, they approved us for a lot more than we thought we’d get, and we definitely were NOT comfortable with that amount. So we borrowed a lot less. I’m sure we’ll be home owners at least until we retire.
Try making multiple sites while working 50+ hour weeks!
Another good reason make sure you are mortgage-free by the time you retire is that the mortgage is usually the largest expense in your budget. Our rent is nearly 60% of our budgeted expenses. Being debt free, therefore, means being to save 60% less for retirement.
That’s wild and I wasn’t aware of this issue. The story of that fellow being denied a mortgage blows my mind!
I’d also agree with you that getting and staying out of debt will cure many problems. That a major goal for us right now. Thanks for a great article.
Great article William. I would say you need to prepare more for retirement and make sure you move before you retire. As a guest writer did on my blog yesterday, you should do anything drastic with your money before you apply for a mortgage or the process will become unbearable.
There are other weird restrictions too! The one that was a thorn in our side was not being able to get a 20% down mortgage on a fixer upper because it needed a front door and was considered “unlivable”. A front door is a couple of hours labor and a few hundred dollars, max. But there was a rule and it scuttled the deal.
I could not agree more with the need to get out of any and all debt before retirement. You need to focus on downsizing those expenses and not doing so will likely play on your retirement and possibly hold you back from what you want to do in it.
I cannot imagine taking out a mortgage when getting ready to retire, but I’m not surprised by the strict process. When we refinanced last year, you would have thought we were criminals with how thorough they checked every little detail.
Wow, I was totally unaware of this. Thank you for such an in-depth article. We plan on paying off our house and being out of debt long before we retire. We won’t be living in our current city, so we were thinking we would rent it. Any thoughts would be appreciated!
Thanks for this post! My understanding is that grad students can get caught up in this too. Our offer letters may not state that our funding is “guaranteed” – even though jobs are not guaranteed either – and students can be denied for that reason.
All the YES in the world to that. And thank you for the very valuable info, William. Paying off debt is going to set us free. Only 2 loans to go.
$170, 000 loan denied with all those investments?! Dang! I think we’ll hang onto our house and rent it when we find the right city to live in. Love the way you wrote the post too. Good measure of humor and great word choice.
I can’t think of a single good reason to borrow money while in retirement. If you’re retired, doesn’t that mean that you’re financially independent? So, why in the world would someone take out a mortgage in retirement? In that example, why doesn’t that person just buy the house in cash?
I’m not surprised that they wouldn’t borrow him the money. If I were that bank, I’d be thinking, why in the world does this guy want a loan if he’s financially independent? That in itself would be a red flag in my mind.
Now, a normal consumer who’s broke, but has a great income and wants to keep their credit score high? I’d be all over borrowing them money. They’ll most likely be staying in the rat race for over 30 years while I collect my precious interest.