Q: We sold our family farm. I took some money from my IRA and with the proceeds from the first farm, we bought another farm.
Although I am 63 and do not have to pay penalty for withdrawing funds from my IRA, my wife suggested that it would make more sense to get a small mortgage rather than paying the income tax on my IRA money.
I found out that I can return the funds to the IRA within 60 days without penalty and without owing any taxes. I am making arrangements to do that through a 3 percent flex rate line of credit.
I tried to get a fixed rate mortgage from my bank but I was told that Freddie Mac and Fannie Mae will not allow them to make a mortgage loan to someone for 6 months when they pay cash for their house.
Is this really true? We are in a financial crisis and while Fannie Mae and Freddie Mac do not need to loan money to people who can’t pay it back, it makes no sense to me that they will not loan money to someone that has paid cash for a house or farm and clearly can repay the loan.
Can you confirm that this correct? It looks like a bureaucratic misunderstanding to me. There probably have not been many people that have done that in the past but I suspect it will increase as more of us Boomers retire. Thank you very much.
A: You are getting correct information. The mortgage market doesn’t make a whole lot of sense, but all of the players have become extremely conservative. You shouldn’t have used your IRA money – too much in taxes. If you can get a home equity line of credit, and the question is IF, then you should do that.
For a variety of reasons, the mortgage market has become quite a bit more complicated. When you buy a property for cash, lenders want to make sure that you have lived in the home for some time before giving you a loan.
Given the amount of fraud in the mortgage industry, lenders are more cautious than ever about doing a “cash out” refinance, where they give homeowners cash when they refinance their mortgage.
What you’re asking for, essentially, is a cash-out refinance. Your home is paid off, and yet you now want a mortgage. The lender has to go through all of the steps to make sure you can afford the payment over the life of the loan. That means verifying your income and credit, savings and investments.
While it’s clear to you that you can afford to make your payments, today’s lending environment requires mortgage lenders to be very sure. The default answer is “No.”
In later conversations you told me that you were able to use your home equity line of credit to pay back your IRA, and are now simply looking for permanent financing. You believe interest rates are going to rise in the near term and want to lock in a mortgage now, while rates are low.
My best advice is to shop around until you find a lender who is willing to work with you. If you can’t get anyone to refinance your debt, then your Plan B should be to pay off your home equity line of credit as quickly as possible, while the interest rate is still low.
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