finance-retirement-living

How To Finance a Retirement Home

Are you thinking of purchasing a retirement home or moving to a continuing care community? There’s a lot to think about, including how you will finance a retirement home.

Dealing with decades of belongings and putting a well-loved home on the market is a huge job for many people. And, if you’re committing to a big down payment or buy-in for your retirement home, the logistics can be tricky. Many people who have considerable equity in their homes will plan on using that equity to finance a retirement home. But how can you use it when it’s tied up in the house? Will you have to move out completely first?

A move to a retirement residence is a big decision, and typically a big financial commitment as well. Usually once the new property has been determined, there is a large cash deposit that is needed to secure the residence. Navigating the “cash” portion of your big move can be daunting, and many people assume that they must settle on the sale of their current home in order to place a large deposit.

Fortunately, using the proceeds from the sale of your home is not the only way to access cash to finance a retirement home. With a little planning and professional guidance, you can take the time you need to downsize and move without the added complexity of “renting back” or finding temporary housing during the transition.

Mortgage specialist Jennifer Meredith helps her clients make these types of purchases quite frequently. She offers the following ideas for very common and relatively simple ways people bridge their loans in order to produce the down payment and finance a retirement home without having to sell their current homes first.

Obtain a loan from your retirement funds.

Check with your retirement administrator to see if you can borrow the amount needed for your down payment for no cost.  You could either get a loan from your own money and pay yourself back or take out the full amount and pay it back in full when your house is sold. This option may be the least expensive and most simple way to go, but you should consult with a tax advisor first to be aware of any potential tax implications. .

Open a Home Equity Line of Credit.

Many people have a large amount of equity in their current homes. A line of credit secured by your primary home could be the key to accessing a cash down payment without having selling your home before you move. There are usually NO closing costs to secure a home equity line of credit, and NO payment monthly if you do not take any money out.  

While each equity line of credit is different, it is very common for a pre-payment penalty to apply if the loan is paid off within three years. That penalty may not necessarily be a deal-breaker, says Jennifer. The penalty could be relatively minimal, like an estimated $2000 cost overall. While this is an expense, it may be the best scenario considering the flexibility it offers. NOTE: Arranging a home equity line can take up to two to three months, so it is imperative to do this in advance, and BEFORE you commit to a contract on your new residence.

Refinance your current property with a Cash-Out option.

Some people take advantage of loan instruments that allow you to borrow 80% of the value of your home and secure the funds within 30 days. Because there would be closing costs and monthly mortgage payments created by this option, it could be the most expensive solution. But depending on your circumstances, this method could make financial sense when you’re completing a complex home transition.

Sources of Income to Qualify for a Loan

Of course, all loans are subject to qualifications and underwriting. If you are operating with a limited or reduced income, or have less equity in your home, it could be more challenging to bridge the time between the two transactions. If you apply, be sure to include these types of income that can be used to help you qualify for a loan to finance your retirement residence.

Social Security Income

When using social security income to qualify for a mortgage, the Lender will “gross up” the amount by 20%. For example, if your social security income is $2000 a month, the Lender would use $2400 a month for income.

Pension

If you receive a pension from your previous job, this income would be used to qualify.

Military Retirement Pay would also be used as income.

IRA/401K

If for some reason, your current income will not allow qualification for both homes, you can set up a monthly distribution from your retirement account to use as income. The Lender will document that the withdrawal is set up.

However, this amount would need to continue for at least 3 years. For instance, if you set up a payment of $1000 a month, you would be required to have at least $36,000 in your retirement account to take advantage of this feature.

Rental Income

If you have rental properties, the rental income you collect can be used as well. Keep in mind that Lenders will not use “dollar for dollar” income. The Lender will review your tax returns and take into consideration your “net” income. Net income is income AFTER expenses on your Schedule E.

If you are relying on the proceeds of your home sale to help you finance a retirement home, it makes sense to review all of your financial options in advance. A qualified and experienced mortgage specialist will help you explore all of the options and loan products that will simplify your move and your home sale too. Get in touch today to speak with trusted professionals in your area.

Jennifer Meredith is a mortgage specialist with Presidential Mortgage in Fairfax, VA.  She can be reached at Jen.Meredith@presidential.com.

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