Needing a mortgage in the age of FIRE? Here are some great alternatives to W2s to help you qualify.
Back in 2015, when I first (semi) retired, I ran into a bit of a roadblock to my future plans. My intention was to spend the rest of my days investing in real estate, but I quickly discovered that mortgage lenders like to see W2 income. In fact, they LOVE applicants with W2 income, the more the better. Freelancers, investors, entrepreneurs… not so much.
So there I was (you know the drill): no cash, no job, massive debt… and with a burning desire to invest in real estate. What’s a FIRE-man to do?
That’s when I started doing some research into how to get around this barrier. Over the last few years, I have discovered some very nice alternatives to W2 income that many lenders will consider. In some form or another I have used all of these, resulting in eight mortgages since my FIRE date back in 2015:
- Retirement savings: this is a relatively new development, but, as explained in the Wall St. Journal, mortgage lenders are actually looking at income produced (or potentially produced) by assets. In fact, did you know that some banks are even willing to take up to 5% of your total 401K or IRA balance and consider this amount annual income? Especially useful for retirees or those with an nice sized retirement account but no W2 income.
- Deferred income: most don’t have this, but I do so I think its worth a mention. I’ll use myself as an example: I worked for several years at a major entertainment company and chose to defer about 50% of my salary. Granted, living on 50% of a paycheck wasn’t easy and my debt mushroomed at this time. But when I left, I chose to have the money distributed to me over a 10 year period – providing 10 years of W2 “income”. Mortgage lenders have used this income to qualify me for nearly every mortgage I’ve applied for. So if you have the option to defer any of your income (ask your employer), it can support your mortgage habit for years to come.
- Rental Income: got properties already? Most lenders will count about 70% of the market rent on them as income. If you have leases on these, even better – some count as much as 100% of the monthly rent as income. And, if you are investing in a rental property, they can also count the expected rent to help qualify you.
- Your last paycheck: if you are going to quit your job, for heaven’s sakes, buy a house on the way out the door! Despite all these great alternatives, W2 income is still the best way to qualify for a mortgage – so take advantage of it while you still can. In fact, W2 income is so coveted by lenders than whenever mine was threatened, my first instinct has been to use it before losing it. For example, the second I heard the first rumor about mass layoffs at my employer, I speed dialed my mortgage broker. I was able to qualify for a mortgage mere weeks before getting the ax.
- HELOC: this won’t help you get a mortgage, but will help you on all cash deals. Case in point: when the economy collapsed in 2009, I still had $100k left in my HELOC. I drained it to buy a condo in Miami, where prices had fallen about 70%. Then sold it five years later for double what I paid. Who says HELOCs can get you into trouble?
- Your new job: yes, you heard me, the job that you are going to get, and stay in temporarily, for the exclusive purpose of showing your bank W2 income. The job market is raging, and it just might be worth dipping your toe in the water even for just long enough to show two paystubs to your mortgage lender. The worst that can happen is you actually like the job and stay longer than four weeks.
So even if real estate is your passion, you can still go forth confidently into the land of FIRE. It just takes a few extra tricks to get the mortgages you may need to create your next empire.
Have you used any of the tactics above? Successfully? Unsuccessfully? Tell me about it in the comments below!