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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.
About The Author
Al Kernek is a Internet marketing consultant, author and Baby Boomer. Learn more about issues facing Baby Boomers seeking to retire on a
limited or fixed income at www.BabyBoomerLifeboat.com which is also an online portal to Websites containing valuable information and resources for Baby Boomers.
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