I’m an older millennial with a $ 2 million investment but low monthly income. Is it worth spending your savings on buying a home in San Francisco?

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I am an “elderly millennial” living near the San Francisco Bay Area. I have no children and do not plan to. I would love to buy a home in the area, but I have a lot of competition from high-paid Silicon Valley tech workers living in dual-income families where they each earn a low to six-figure average. This translates into the average selling price of a home in my city in excess of $ 1 million.

I make as little as $ 5,000-6,000 a month all the time, but sometimes I get huge windfall profits. I currently have about $ 2 million in liquid investment and a credit rating of 815, but due to my low stable income, I still cannot qualify for any loan needed to buy a home here and will probably have to pay cash for any home. I’m buying.

I really don’t want to cash out so much of my nest egg just to buy a home that isn’t close to my dream home, but I feel like every time I’ve waited for the housing market to cool off, it just keeps going. increase. Also, I feel like I must have at least $ 5 million before I spend an entire million in one go, as I would very much like to “retire” early and that would force me to give up so much of my portfolio.

What should I do? Wait? Buy something before the market gets worse? Buy land for $ 300,000 and build something on it? Or just have a drink and leave this crazy place where for a million dollars you get a two-bedroom, 1.5-bathroom home?

Sincerely,

No millionaire home

Big move‘is the MarketWatch column that covers all the intricacies of real estate, from finding a new home to applying for a mortgage.

Do you have a question about buying or selling a home? Do you want to know where you should take the next step? Email Jacob Passy at TheBigMove@marketwatch.com

Dear millionaire,

If that comforts you, take it easy knowing that you are far from alone when it comes to situations like yours. But this is usually a problem that we face later in life, not when we are in our 40s.

The problem stems from regulations passed over the past decade to protect borrowers from risky loans, which have had some unintended consequences.

“The new rules are written to take care of people who don’t have that kind of money,” said Brian Koss, executive vice president of Mortgage Network, a mortgage banker based in Danvers, Massachusetts. These new lending rules stem from legislation that came into force following the Great Recession and the subprime mortgage crisis.

Lawmakers wanted mortgage lenders to scrutinize applicants’ finances to make sure they had the ability to repay any loans they received. However, the side effect of this was that it suddenly became more difficult to qualify for a mortgage if you had a lower monthly income but a large number of assets to rely on.

“This happens to a lot of older people in their 60s who have just retired,” Koss said. “They have no history of income, but they have assets between $ 3 million and $ 4 million. So they sell their home in Kansas and move to Hilton Head, and suddenly they don’t meet the requirements in the traditional sense. “

There are workarounds in situations like this that you should consider, according to Koss. First of all, look for so-called portfolio lenders – these are lenders who do not sell the rights to service their loans and do not keep loans in their books (in other words, in their portfolio). Because they plan to keep loans in their portfolio, they are not going to sell them to Fannie Mae
FNMA,
-1.17%

or Freddie Mac
FMCC, St.
-2.35%

Hence, these lenders don’t need to follow the same strict rules for loans sold to these mortgage giants, giving them more flexibility in situations like yours.

These will tend to be smaller or medium-sized lenders – small local banks or credit unions are good examples of the type of financial institution that can offer this flexibility, rather than the big banks or larger lenders that advertise during the Super Bowl. Specifically, ask around if someone makes an asset depletion loan. With these mortgages, they will view your liquid investment primarily as a source of income that you can use to make monthly payments over the 30 year loan term. This does not mean that you actually have to use this money, but it increases your chances of qualifying.


“The new rules are written to take care of people who don’t have that kind of money.”


– Brian Koss, Executive Vice President, Mortgage Network

Be aware that smaller lenders that don’t work with Fannie Mae and Freddie Mac may charge higher interest rates. And a loan like the one I just described might be too expensive for you given your monthly income.

Another problem you may face is that lenders are still very careful in light of the pandemic. Since the outbreak of COVID-19 and the associated economic crisis, lenders have seriously tightened their wallets to avoid taking on borrowers who could eventually be foreclosed. Mortgage Bankers’ Association data show that mortgage availability has fallen to its lowest level since 2014 last year after the outbreak of the pandemic, and has, in fact, remained at that level. In other words, banks are now taking the same approach as when the economy was emerging from the Great Recession.

If you ultimately can’t get a mortgage, it’s time to look in the shower. What are your goals and where does home ownership fit into them? You say you want to retire early – what are you applying for so early? At 45 or at 60? Depending on how soon you want to retire, you won’t have a lot of runway to recoup the money you spend on your investment in order to put it into a home.

Financial advisor Jordan Benold argues that you don’t have to treat a home as an investment, and other financial experts have told me the same thing in the past. “Of course he appreciates and you want it, but he won’t pay your bills after retirement,” Benold said. After all, everyone needs a roof over their heads; It is important to weigh whether a home is a commercial venture or a necessity.

Maybe home ownership really matters to you – but is it important enough to use up half of your savings in one fell swoop? If this is truly the goal you want to achieve, it may be best for you to leave the Bay Area, as many others have done. Just make sure that if you move, the move doesn’t hurt your ability to move up the career ladder. Because even if being in the Bay Area means you have to be a renter, it will be worth it in the long run.

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