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Can I Buy a House if I FIRE Retire Early?

Can I Buy a House if I FIRE Retire Early?
Zina Kumok Contributor

As more people shift their focus away from a career-centric mindset, the Financial Independence, Retire Early (FIRE) movement has gained momentum. FIRE involves dedicating as many of your financial resources as possible towards the goal of early retirement, while also living frugally to free up more investment money.

While many older retirees who left the workforce closer to the traditional retirement age have already found their forever homes, FIRE practitioners skew much younger. They’re more likely to buy a home after retiring – if they can get approved for the mortgage.

You can certainly buy a house if you decided to FIRE retire early, as long as you can prove you can afford your monthly mortgage payment.

What's in this Article?

How does FIRE impact the homebuying process?
7 tips for buying a house after you FIRE retire early
Frequently asked questions
Balancing FIRE and homeownership

How does FIRE impact the homebuying process?

When you apply for a mortgage, your lender will run a credit check and verify your income and assets. To determine how much of a mortgage you qualify for, the lender will calculate your debt-to-income (DTI) ratio.

The DTI is your monthly debt payments divided by your gross monthly income (meaning income before taxes). The maximum DTI allowed depends on the type of loan you plan to use to buy the home. But you should aim for a DTI of 50% or less.

debt to income ratio

This is where early retirees run into trouble. Many retirees live on enough money to sustain their lifestyles, but not enough to qualify for a mortgage.

“I’m wealthy, but I’m just not wealthy in the right way,” says Robert Chase, who tried to get a mortgage after retiring in 2019 at age 37.

He already owned a home in Dallas, but wanted to sell it and move to the Charleston, S.C., area. But when he tried to qualify for a mortgage in South Carolina, lenders would only approve him for a $300,000 home. He was looking at homes in the $650,000 range, but each lender said he didn’t have enough income.

You can qualify for a mortgage based on monthly investment dividends, but only if you’ve been receiving this type of income for two years or longer.

Some borrowers may qualify based on their total liquid assets, meaning those readily turned into cash, but only if they meet a certain threshold.

Early retirees who don’t meet those criteria may struggle to get approved for a loan, even if they are living comfortably off savings or recently began living off their investment dividends.

“I’ve been ghosted by three mortgage loan officers as soon as they heard I didn’t have a large W2 anymore,” Chase says.

Challenges FIRE devotees might encounter when buying a house

Chase said that before the housing crash of 2008, it was easier to qualify for a mortgage without having a steady, W2 income. If you had enough assets, the lender would just have to verify them and give you a mortgage based on those assets.

But since the housing crash, lending requirements have tightened, making it more difficult for some homebuyers to qualify on assets alone. Federal regulations require lenders to verify that a homebuyer will be able to afford their monthly mortgage payment, which depends on their monthly income. If you cannot prove you have sufficient income, it will be difficult to get a mortgage.

The good news is that income from employment is not a requirement for a mortgage. There are several other types of income you can use to qualify for a home loan, including:

  • Investment income and dividends
  • Rental property income
  • Self-employment income
  • Disability benefits
  • Social Security income
  • Child support and alimony

Investment income and rental property income will likely be key to purchasing a home if you’ve already retired, unless you plan to pay cash.

Learn more: 8 Types of Income You Can Use to Buy a Home

7 tips for buying a house after you FIRE retire early

If you decide to FIRE retire early, you may have to get creative to get approved for a mortgage. Here are seven tips to try.

Wait to retire until after you buy

If you haven’t yet retired, consider holding off on leaving the workforce until after you’ve bought your home. The process will be much more straightforward with employment income, and you might be glad to still have a steady paycheck as you adjust to your monthly mortgage payment.

Get a W2 job

If you’ve already used FIRE to retire early, you could consider getting a W2 job for a time to qualify for the mortgage. You could also take on some work as a contractor or start a business. You can then use your self-employment income to qualify for a mortgage. The downside to non-W2 income is that you’ll need at least two years of tax returns before you can get approved. That’s why a W2 job is the fastest way to qualify for a home.

Take investment dividends to qualify

If you receive monthly investment dividends, you can use that income to qualify for a mortgage. However, you’ll need to show at least two years of this income to qualify, either on your tax returns or on income statements. This would not be an option if you only recently started receiving dividends and want to buy a house now.

Ask for an asset depletion loan

An asset depletion loan may be a popular option for FIRE devotees who need a mortgage after they’ve retired. For this kind of loan, the lender will add up your total investments assets and divide them by 360 (the number of months in a 30-year home loan). They’ll use that figure as your monthly gross income. For example, if you have $1 million in invested assets, your monthly gross income would be $2,777.

However, there’s a catch with asset depletion loans. Only taxable investment accounts will be counted as income for an asset depletion loan, so tax-advantaged retirement accounts, including both Roth and traditional IRA and 401(k)s, will not be included.  

Additionally, stocks might only be counted at 70% of their current value. That’s because lenders typically account for volatility in the stock market.

Here’s how an asset depletion might work using example numbers:

Home price$400,000
Down payment$80,000
Loan amount$320,000
Estimated payment w/taxes & insurance$2,100
Income needed to qualify (45% DTI)$4,666/mo
Qualifying assets needed$1,680,000
Assets needed if in stocks (70% used)$2,400,000
Example only. Your payment, DTI requirements, and asset qualification rules may be different.

As you can see, it does take significant assets to qualify for an asset depletion mortgage, but it’s possible. And, the assets need to “live” in the right kind of accounts.

If you’re planning to get a mortgage at some point after you retire early, you may want to start contributing money to a taxable brokerage account right now. You won’t get the same tax benefits that you would with an IRA or 401(k), but qualifying for a mortgage will be significantly easier.

Take 72T distributions

The third option is to take a 72T distribution from a traditional IRA or 401(k). The 72T rule says you can withdraw 3.3% of your account every year for five years or until you turn 59.5, whichever comes last. These distributions will count as income for a mortgage lender.

You don’t have to pay the 10% early withdrawal penalty that you would normally owe by taking distributions before age 59.5, but you’ll still owe income taxes on the distributions.

The drawback to 72T distributions is that you might withdraw more than you actually need to live on. That money would then not be invested in the stock market, where it would have the opportunity to grow further.

Pay cash for the house

If you pay cash for the home, you will not need financing or to worry about proving your assets and income. Paying cash is no small feat, especially in today’s market. But if you’re retired, you could feasibly buy a home further out where prices are lower, or even purchase a fixer upper, since you have the time to renovate it.

Get a cosigner

If you’re having trouble getting a mortgage, you could ask someone to cosign for you. The cosigner will be financially liable if you stop making payments on the loan. To qualify as a cosigner, the person will need to have good credit and a steady income of their own.

The problem with asking someone to cosign on a mortgage is that it can affect their ability to qualify for another loan. Asking someone to cosign on a mortgage may be much harder than the options listed above.

FIRE retire early FAQs

How much do I need to retire early FIRE?

There’s no magic number that early retirees need to aim for. The exact amount depends on how much you spend annually, what kind of lifestyle you have, and when you plan to retire. A 35-year-old retiree living in Seattle will likely need more than a 45-year-old retiree living in Iowa, for instance.

There are several FIRE calculators you can use to get a basic estimate of how much you’ll need. If you’re interested in early retirement, consider meeting with a financial planner who will help guide you through the planning process.

What is the 4% rule in FIRE?

The 4% rule in retirement refers to limiting withdrawals to 4% of your total investments annually to avoid depleting your accounts. When the 4% rule was first popularized, it was meant for a 30-year retirement.

Since most early retirees will have close to 50 years in retirement, many experts say the 4% rule is too aggressive. A financial planner can evaluate your current spending and invested assets to help determine what withdrawal percentage is safe for you.

Is it worth it to retire early?

Retiring early is a personal choice, and many FIRE fans choose the path because they want to spend more time on hobbies and with family. But retiring early means planning ahead, making sacrifices, and prioritizing saving above almost everything else.

There’s no right answer when it comes to retiring early. For some people, living far below their means in their 20s and 30s is much more difficult. For others, it can be easier because of a large salary or an inheritance.

Balancing FIRE and homeownership

If you want to buy a new house during early retirement, Chase advises doing it before you quit your job. It’s much easier to qualify for a second mortgage while you’re still traditionally employed than it is to qualify for a mortgage when you’re retired.

But if you’re already retired, you can still buy a home. You may need to be strategic about it, and you may have to establish certain income streams before it can happen. It’s entirely doable, though, especially if you work with a trusted financial advisor and a lender that will help you strategize your homebuying plan.

The information in this advertisement does not constitute financial planning or investment advice, and should not be understood, construed, or relied upon as such.  The information and statements contained herein are not a substitute for financial advice from a professional who may be aware of the facts and circumstances of your specific situation.  Fairway strongly recommends that you seek advice from a professional financial advisor prior to making any financial planning or investment decisions.

Further Reading

Fairway Advantage Pre-Approval is the Key to a New Home

$15k First-time Homebuyer Tax Credit 2021: All Your Questions Answered