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Helping Ourselves

John Yeigh

WE NEEDED MONEY to close on a new home. The mortgage process progressed smoothly—until the underwriters suddenly rejected the property right before closing. To get together the money needed to close, my wife and I had to resort to loan sharks—ourselves.

We borrowed from our IRAs. The rules allow tax-free distributions for either a 60-day rollover to a new IRA or reinvestment back into the same IRA. When we called Vanguard Group to execute our “rollovers,” the phone reps were well-versed on this short-term, self-funded loan strategy.

They even advised us on the critical rules. The money must be reinvested in an IRA within 60 days or taxes are owed on the withdrawal. Rollovers are allowed only once per 12-month period across all IRA accounts. Since IRA rules apply to individuals, household members can take advantage of the strategy at the same time.

Why was all this necessary? The mortgage application process, property appraisal and title search were slow going, thanks to today’s hot housing market. The mortgage process took a lethargic 70 days, only for us to get rejected due to extra land and summer cabins included in the purchase. Those items added value to the property but didn’t “conform.”

We would have been smart to have lined up alternative financing possibilities, such as setting up a home equity line of credit on our old house, arranging to borrow against our taxable investment accounts or pursuing a higher-cost mortgage option elsewhere—one that acknowledged the property’s unusual features.

Following the rejection, we immediately pursued a cash-out refinancing on our existing home. We got a head start by using the same lender that had refused to write us a mortgage on the new property. This refinancing payout landed in our bank account 20 days after closing on the new property. We “rolled over” this money back into our same IRA accounts well within the 60-day limit. We even got a little lucky: While the money was out of our IRAs, the stock market declined 5%.

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John Yeigh
John Yeigh
10 months ago

See more below

Last edited 10 months ago by John Yeigh
Humble Reader
Humble Reader
10 months ago

We also have a “non-conforming” property and have experienced the same frustration with financing and using our equity. Fannie Mae and Freddie Mac set the rules but banks will often have additional restrictions. A “conforming” mortgage can be sold and bundled into a package of mortgages. Companies who originate loans and intend to sell them will only do conforming loans. Properties which are measured in acreage instead of square feet are often non-conforming due to the land value to property value ratio. No more than 35% of the appraised value may be attributed to land value. Ten acres maximum and sometimes only five.
We own a 12 acre wooded parcel with 600 feet of beautiful lake frontage and we live in the 960 square foot 1950’s cottage on it. This puts our land value at about 90%. We own it free and clear. In a rational world one would think that getting an equity secured loan would be a slam dunk since even if the cottage were vaporized, the land value is more than enough to fully secure the loan. Nope, it does not work that way.
At a prior attempt (there have been several over the years) at getting a home equity loan so that we could remodel and expand the cottage the maximum amount we were offered was calculated by taking a percentage of a percentage of a percentage of the appraised value. The amount ended up being less than the cash in our checking account. Not enough to even consider starting the project.
So we have lived in our cottage a lot longer than planned.
But there is always hope. Last week we started an application for a HELOC.
 

John Yeigh
John Yeigh
10 months ago
Reply to  Humble Reader

We were open with the mortgage company that the property sale had several structures and two land deeds. They indicated “no problem”. We separated out the one tiny land deed which adds value, but the multiple structures became the non-conforming issue. If the appraiser had not designated that the one summer cabin (no heat in NH) as a full time house, the loan would have conformed. The loan failed because of this extra cabin which generates maybe $12K/year in summer rental income – ie the cabin adds rather than detracts from value. A mortgage designated for “multi-family” structures had interest rates nearly 1% higher.

Guest
Guest
10 months ago

I feel strongly that all responsible homeowners open and maintain a HELOC.

John Yeigh
John Yeigh
10 months ago
Reply to  Guest

Indeed, this is a good strategy to maintain cash flow optionality.

Mark Caspary
Mark Caspary
10 months ago

That was lucky! Aggravating but lucky! Glad it worked out for you.

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