THERE ARE A GREAT many terrible problems. Having too much cash typically isn’t seen as one of them. Yet that’s where we are. Following our move back to the U.S. from Spain, we found ourselves with an abundance of cash sitting in our brokerage account. And these days, with interest rates the way they are, that cash doesn’t do much more than sit.
The upshot: We decided to purchase some rental properties. We have one rental unit already—our former home—but we plan to make it our home once again. With the help of our property manager, Jeannette, who is also a realtor, we searched for and found one property we liked, and with a price that was already reasonable but which we hoped to negotiate lower. We thought we could jump to the front of the buyer’s queue by offering cash. Jeannette said we would need to show the seller proof of sufficient cash on hand.
That’s when the problems arose.
We didn’t want to just show our Vanguard Group brokerage statement, because that would tip the seller as to how much cash we had available, likely making her hold firm on the price and reject our request to pay for improvements in the heating and air conditioning system. Jiab called Vanguard to inquire if the folks there would issue a “line of credit” letter for the amount we wished to offer.
We had more than enough cash to buy the property three times over and we could have borrowed the necessary sum using a margin loan—and yet they declined. They didn’t want to take the risk of backing us, despite the cash they were so graciously holding for us.
Not to be thwarted, Jiab called around to see if we could quickly qualify for an investment loan for the amount we wished to offer. We didn’t need the loan, but we could use a preapproval letter to show the seller our ability to pay.
We didn’t qualify, even with our 800-plus credit scores.
Apparently, real estate loan systems are set in formulaic stone, where the key factor is the loan-to-income ratio. As retirees, our income is low. Wealth—as in cash on hand—apparently doesn’t factor into the formula. Our sons, who are just starting out in the work world and so have a solid income but no accumulated wealth, could better qualify for a loan than we could. It seems you could win a $1 billion lottery, but—if you then quit your job—you might nix your ability to get a loan.
Why didn’t we simply open a financial account elsewhere and move part of our cash into that account, shielding it from the seller’s view? That would have taken longer than our five-day option period.
Don’t get us wrong. We’re not advocating going back to the purely subjective It’s a Wonderful Life days when George Bailey gave a loan to his friend Ernie because he believed him to be good for it. In that sort of world, totally inappropriate factors—such as race and gender—became systematically factored in. We must continue to guard against such biases in lending and, when we do see them, address and eliminate them.
On the other hand, the cold, formulaic real estate lending analysis of today seems geared solely toward people who want to leverage their income into accruing debt to gain housing. Jiab spent years in credit risk management for a major bank. She, of course, looked at debt-to-income ratios to assess risk, but she also considered other mitigating factors, including wealth and credit scores. Such factors should be included as well.
Jiab found another lender who was willing to give us a preapproval letter, but it took time and searching on her part. Evidently, this second company did factor in credit scores and assets into its loan approval logic. Meanwhile, our realtor also suggested depositing the money with the title company as a neutral third party to verify we had the funds. This could have triggered more fees, plus it would have locked away the money prematurely before closing.
In the end, we showed the seller an email confirming a wire transfer from Vanguard to our bank account for the amount of the asking price. This seemed to satisfy the seller and her realtor.
There are more and more retirees who, by luck or hard work, rely less on income and more on the nest egg they’ve built over the years. Maybe the lending system should stop punishing them for finishing the rat race early.
Jiab and Jim Wasserman just returned to Texas after spending the first three years of their retirement in Spain. Check out earlier articles by both Jiab and Jim.
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| Apparently, real estate loan systems are set in formulaic stone, where the key factor is the loan-to-income ratio.
Yep. The finance industry business model is keeping consumers in perpetual debt. The more the better. Many of the actions you would take to become financially independent are completely at odds with the industry. A short list of things that *hurt* credit scores: paying off loans early, paying off loans at an accelerated pace, closing unused credit lines, refinancing and paying with cash/debit cards. All of which have helped our net worth considerably while dropping my credit score by 150+ points over the past three years.
A new problem, for sure! I’ve found a local credit union that is happy to lend me money for 10 years based on my income streams from one rental and a mortgage loan to my son, etc. Investment income is variable so they don’t like it as much. They also don’t like tax-sheltered accounts as much because they are harder to tap in the event of payment defaults. The question in underwriting is not just whether the borrower will default, but what will they do if the borrower does default.
I find it is best to borrow on the house I’m living in, and to pay cash for other things. Others’ experiences may differ.
Of course, buying investment properties with debt is not the most conservative investment choice, as debt always is due while income and appreciation are never completely guaranteed.
Vanguard allows you to generate a financial report using their website. You can filter the accounts you want to show. When I purchased a house with cash I transferred the amount into a Vanguard money market account and then generated a report showing only that account. The buyer accepted it.
For future reference you should develop a relationship with a commercial loan officer at a community bank. As the senior commercial loan officer for my $400 million bank I often receive similar requests. The letter that I provide while not technically a pre-qualification letter has been accepted by sellers and their agents.
Interesting read, I’m not surprised about the loan process only because when I retired a few years back a representative at Charles Schwab had suggested I get approved for a loan from Quicken Mortgage before my income stream reduced, at the time it sounded silly…..I did it and still carry the line of credit today. I remember as I completed the application the loan company is not interested in my net worth only my income. FYI, my Schwab brokerage account will allow me to print a balance letter on any account that shows the current balance and average daily balance for any one of my accounts, would this have been helpful with the real estate purchase?
Thanks for the tip. I just checked out the site and it appears they offer mortgages and refis. Did you mean that you have an open-ended line of credit, or is it a pre-qual letter with no expiration?
Question…Why do “race and gender” issues frequently appear in your articles?
Well, if I may answer that on two levels, on a micro level we are a mixed-race family and so our paths, separately and together, have been affected by those factors and we want to share our experiences with others. On a macro level, even if we had not personally experienced issues of race and gender, we want to illuminate these issues so that greater equity can be achieved in the supposed neutral world of finance. In essence, race and gender issues frequently appear for many in the real world and so we take note of them. Fairer for one, fairer for all. Be well.
Jim…I’ve personally experienced ethnicity and/or gender reverse discrimination on a “micro level”…my wish is that you would illuminate ALL sides of these issues on a “macro level”…fair enough?
Mik – I think any discussion about discrimination in the workplace (or anywhere) would be great. As with any problem, examining it in all its facets is the first step to alleviating it. I would invite you to share your experiences by way of an article. I can’t speak for Jonathan and HD, but I would personally love to read it!
I’ve had very much the same experience when trying to get a home loan. EVEN with OWNING (no mortgage)my current home, and funds 4X the cost of the price range of homes I am looking for in my retirement account, the “formula” for getting a loan in the amount that I could EASILY handle precluded me from getting the loan. No wonder we had a housing crash in 2007 – apparently people who make loans can only plug numbers into formulas, and canNOT think at all. The fact that I had not withdrawn ANY money from my retirement account, even though I have been retired for 8 years also worked against me. Reminds me of bizarro superman…
When my wife and I made cash purchases of rental properties last year we transferred the amount of cash we wanted the seller to see to an online bank account.
Similar situation with trying (and failing) to refinance a mortgage. Lot of assets, no “job” except managing those assets. Can’t quality for refinancing unless I restructure those assets and produce a fixed income stream. The interest rate I’m paying now isn’t bad and I could pay off the balance but choose to keep it invested in assets I earn a few more points on.
Did you try Schwab? They have a tie-in with Quicken Loans (Rocket mortgage). They look at assets at Schwab and give a discount for larger accounts. I used them when buying my current home.
Quicken Loan was the first one I reached out to and was declined. We have most of our assets at Vanguard anyway so most likely it won’t make a difference in our case.
It’s interesting how challenging it becomes when you try to go against the norm. The last car I bought, I told them I wanted to pay cash. The salesman was fairly new, and had no idea how to handle it. He kept asking me what monthly payment I wanted, and I kept telling him I wanted to pay cash. Took him three meetings with his finance manager, before they figured out how to take cash.
This is also one of the reasons we recently recast our mortgage, as opposed to refinancing.
Rick, thanks for mentioning the option to recast. I assume you had to pay a lump sum to do so and were thereby reducing the payment? I don’t think you can change the rate or loan period in a recast, so I’m thinking that had to be the benefit you were able to gain from recasting?
And the unfairness doesn’t end there. Keep income low even with millions in the bank and you become eligible for subsidies like with ACA premium subsidies. Keep the cash in a retirement account and you are eligible for more student aid. Incomes and net worth are definitely in different categories often unfairly.
Exactly! The capital gains tax from selling our house in 2019 pushed us into the highest Medicare B premium bracket. In 2020, the RMD suspension allowed us reduce our taxable income to an amount that put us in the lowest bracket.
The unfairness also exists in how your income is received, i.e. wages vs capital gains. I understand the idea behind two different rates, but not only is that system gamed by the ultra-wealthy, I’m not convinced that the claimed policy benefits of unique capital gains rates have much value.
To your point on tax-advantaged accounts, and to focus on Traditional vs Roth: two things I think I’ve learned:
First, the exclusion of Roth income from taxable income means those with a large percentage of Roth savings may fall below the threshold(s) for taxation of SS benefits and obtain the lowest Medicare rates. It’s possible to have 3x to 4x the median US income and pay virtually nothing in taxes, no SS taxation, and ACA subsidies / lower Medicare costs as well, if the income is not taxable… but it’s often not worth the effort to make this happen because the upfront taxes you have to pay may more than offset the eventual benefit.
Secondly, I posted elsewhere that I’ve switched all my new savings contributions to Roth to take as much advantage of the tax laws as possible, as I think the worst case for me personally at this point in my savings arc is to break even in the long run, though I have more analysis to do… but the main thing is that I’d have to convert much of my accumulated lifetime savings in Traditional over to Roth to really gain much advantage, and for many people (including me) that’s not only difficult to do on a breakeven basis, but also it appears to me that for most people there’s little benefit unless you have some serious savings (approaching $2M).
Finance being personal, there will be unique exceptions where the above is not true, but I’d be interested in learning if anyone believes there are broad exceptions to these statements
The downvotes are curious. I thought this post was pretty fact based and inoffensive. Perhaps you could leave a constructive comment. I don’t bite.