How can I buy a house with no income?

Ralph
00:00:00

Are you dreaming of owning a home but feel like your empty bank account is slamming that door shut? You might be surprised to learn that there are ways to turn that key and step into your very own home, even without a steady paycheck. But you got to beware. Some paths can lead to financial disaster. Stay tuned as we uncover the shocking story of John. He's a client of mine who thought he'd found a clever shortcut to homeownership by tapping into his 401(k). His decision, while it seemed brilliant at first, quickly turned into a $80,000 nightmare. So don't miss this eye-opening episode where we'll explore how you can buy a house with no income and more importantly, how to avoid the pitfalls that could leave you house rich but desperately cash poor.

Narrator
00:00:48

Welcome to the Ask Ralph podcast, where listening to an experienced financial professional with over 30 years of experience can help you make sense of confusing questions, current headlines and industry trends about taxes, small business, financial decision making, investment strategies, and even the art of proper budgeting. Ask Ralph makes the complex simple by sharing his real world knowledge from a Christian perspective with all things financial.

Now here's your host, Ralph Estep Junior.

Ralph
00:01:17

Welcome to the show and thank you for joining me today on the Ask Ralph show. I am so glad you've taken some time to join me. Now yesterday, we talked about surveillance pricing. If you missed that, I want to encourage you to go back and check it out. And the whole discussion was about whether that surveillance pricing really costs us more. And it was an eye-opening episode that might change the way you shop online.

Today, we've got a heartfelt message from Debbie. She says she's a devoted listener and she's facing a really tough situation. So let's see what Debbie asks us. Here's her letter. She says, "Dear Ralph, I've been a faithful listener of your show for years, and your advice has always been a beacon of hope. I'm writing to you today with a heavy heart. I recently lost my job due to company downsizing, and at 55, I'm finding it difficult to secure new employment. Despite this feedback, I've always dreamed of owning a home. I have some savings and an inheritance from my late parents, but no current income. Is it even possible for me to buy a house in this situation? I feel lost and discouraged. Please help."

Debbie, first of all, let me assure you. You don't have to feel lost, and you don't have to feel discouraged. I appreciate you sharing that today. Your vulnerability and talking about losing your job, it's honorable and it's a tough situation. And I can sense that you're feeling trapped between your dreams of owning a home and frankly, the financial reality that you don't have income right now. Yeah, as they say, life throws curve balls sometimes.

Today I'm going to share some options that might just give you some hope and some ways to take into that homeownership. It's a thing that a lot of people just strive for. And it could feel like you can't do it. You know, you've lost your job. You're looking for another job. You've got no income, but I've got some hope for you.

I've got some options today. If you've got a question like Debbie, I'm going to encourage you to send them to justaskralph.com. You go there and listen. There are no silly questions. I will address every single question I get and if the question is a big question we can use for this show, you'll actually hear it on the show.

You know, Debbie, I always like to start with a scripture reference, and I thought about your question. And what you're really asking me about is wisdom and planning. And the truth is it's crucial in financial decision-making to look for biblical wisdom.

So I wanted to do some digging. And I've found some biblical wisdom. And this comes to us from the book of Proverbs, it's right from chapter 24 verses 3 and 4. And it says this. "By wisdom a house is built, and through understanding it is established; through knowledge its rooms are filled with rare and beautiful treasures." And you know, I thought about it. And that Bible verse is a huge reminder. And we really need three things. We need wisdom, we need understanding, and we need knowledge. And that's my goal today to impart some wisdom, some understanding and some knowledge.

Well as we get into this discussion, I wanted to share a story with you about a client I had named John. Now John had been working for the same company for 20 years and he got laid off. And John was in a similar circumstance to you, Debbie.

He was having a hard time finding employment. Now in John's case, he had built up this huge 401(k) balance. But John did own a home, and he wanted to buy a home. And John came up with a plan and his plan was this, and this was before I ever met John. So let's be cautious about what we talk about here. But John came up with this plan.

John's plan was, I'm going to liquidate my 401(k) plan and I'm going to pay cash and buy a house. He so much wanted to buy that house, and it seemed like a logical solution to him. He's got money in his 401(k) account. He wants to buy a house. Let's make it happen. And he thought further, he said, this is going to be fantastic.

I'm going to have no mortgage. I'm not going to have to pay monthly payments because I paid cash for this house and I'm not going to pay any mortgage interest. So, hey, this is a great financial decision. It sounds good, right? You might be thinking to yourself, Ralph, what's the problem with that? Well, let me just tell you that story took a horrible turn. And see here's the problem.

John did that without asking for any guidance from anybody. He simply went to his HR person, set up the distribution, bought the house, paid cash for it. And he bought a $200,000 home with cash. And like I said, he took 200,000 from his 401(k) and John and his wife felt like they were on top of the world. Well then came tax time. John saw an advertisement for my accounting practice.

He scheduled an appointment with me and him and his wife came in. We sat down and we started looking at his taxes. He started giving me his documents. He was telling me about this fantastic house they had bought here, close to my office. And I mean, they were ecstatic about it. They were happy. You could see so, so much the happiness that they had. As he started to give me his documents, the first document that I saw was a 1099-R. Now that's basically a form that you get when you take a distribution from retirement plan. And I looked at it and I said, “Well, wait a minute.” I'm thinking to myself, “This is a $200,000 withdrawal.” And there were no taxes withheld from that. And as soon as I saw that I knew I had an issue, so I said to John and his wife, I said, John explains something to me. I see the 1099 you've given me. Did you roll this money over? Because most of the time when I see something like that, my assumption is going to be that they took a distribution and rolled it into another plan. You know, he had left his job
so it was a logical thing. And John and his wife said, no Ralph, you don't understand. We bought a new house, and we paid cash for it. And at that point, I knew we were in trouble. So I finished working on the return and got to the results. And when I do someone's tax return, I interview with them. I talk about all the different pieces to the puzzle. And then I try to give them an idea of what we're looking like before I finalize it. And I pulled up the screen.

I looked at the final number and I said, John, and I don't remember his wife's name. I said, John, listen. I don't have great news today. And he looked at me like, “Well, what could it be Ralph?” And I said, “You actually owed the IRS $68,000. “

He was in shock. And then I said, but that's not the worst part. You also owe the state of Delaware $12,000. And I could see him and his wife quickly doing the math in her head. And I said, yeah, that's 80 grand. And see here's the problem. Because John was younger than 59 and a half, not only did he have to pay tax on this as what we call ordinary income, which pushed him into a higher tax bracket, there was also that 10% penalty for taking the money out before 59 and a half. And it was one of the saddest things I've ever seen in my office.

John and his wife broke down, crying in my office. You could sense the emotion, their faces were just red, their tears were streaming. And we talked about yes, they own the home. That was fantastic. That's great. They own a home, but here's the problem. They ended up having to take out a home equity loan to pay the taxes.

Yes. They owed $80,000. And here's the other problem. Without having an income, they had a struggle getting that home equity loan. It took months to get it. And he didn't have the money in a bank account or write a check to the IRS because they had spent it all on buying that house. And because it took months to get it, they ended up paying the IRS extra money.

They paid penalties, they paid interest, and it was just a devastating situation. I think at the end it was close to $90,000. So think about that. They bought a $200,000 house. It costs them $90,000 in tax. And so what can we learn from this? This is why it's crucial. Absolutely crucial. If John had come to see me before he made that decision, I hope I would have been able to talk him out of it. And that's why it's crucial to seek professional advice. Like I said, you've got to get that guidance before you make that decision. Once they came in to get their taxes done, there wasn't much I could do. I could make it look nice on the paper. I could give them ideas of how to set up a payment plan, and how to get the money. But there wasn't much I could do because after they made that decision, it was too late. So Debbie, you asked me about what can I do to buy a house. I want to buy a house.

I don't have income. Let's talk about some options for Debbie that are hopefully better than liquidating that 401(k) cause Debbie, you might have one of those two. And you might have thought about that. But listen, talk to somebody. Talk to me before you make that decision. Well, let's look at some other options. Another option you could use is what I call use of assets.

If you've got significant savings. Debbie, you mentioned you had a savings account. Maybe you got investments. Some mortgage lenders will allow you to use that as proof of your ability to pay for your home. Because they're going to consider that assets in lieu of income. So if, for example, you don't get a job and you needed to start making payments on this mortgage, you could liquidate some of your investments to do it.

And again, each lender is different, but it's certainly a better option than paying that huge tax bill. The second option is what we call gifting funds. This is where you ask for a gift from somebody that you can use for a down payment or even purchase a home outright. Maybe you've got a parent, maybe you've got a friend, you know an aunt or an uncle that wants to give money for maybe the down payment portion, or maybe they want to give you the whole thing. Now the thing you need to understand, there are some tax issues related to that, and I've done an episode on that, that whole idea of gift taxes.

So you'll find a link in the show notes for that episode. I'm going to encourage you, if you're looking at using a gift to buy a home, because it's a big, you know, dollar number, make sure you check out that episode. Another thing a lot of people don't think about is inherited property. This could be a pathway to home or homeownership. You know, Debbie, you didn't mention this, but you said your parents had passed away and left you a small inheritance.

Maybe they left you a house. And maybe that house just isn't the right fit for you. So one of the things you could do, if you own the home outright, because you inherited it, maybe you sell that property and buy a new home that better suits your needs. You know, maybe you don't need to go get a mortgage because maybe you downsize, maybe you find a house that's of comparable value, and you basically do an exchange for lack of a better term.

You sell property A and move in property B. So using that inherited property is another option. Here's what a lot of people don't think about. And that's a rent to own agreement. If you really want to get into a home, one of the things you can do is rent a home with an option to buy it in the future. And that may give you some time to establish that new income stream. Debbie, in your case, maybe you go find a house you really like, and you make an arrangement with the owner of the house to do a rent to own.

But here's the thing. You've got to understand the details. You got to understand what those options look like and understand the terms upfront. I actually did this in my own life. My wife and I decided to buy this farm we now live on, and I had this friend, we had a house, and he said, Ralph, he says, “You know, right now I really can't afford to go get a mortgage. I'm just starting out in my business. “

He said, would you consider doing a rent to own. In his case, I said, yeah, he happened to be a client of mine. I said, yeah, we can do that. And we laid out the details. We put the options together and, in the end, he ended up not buying the home, which was a windfall for me, because all that money that he had been paying towards that potential down payment. We put it in the agreement that if you didn't pull the trigger on that, you know, we would retain those funds.

And it really helped us because it got us to a point where the housing market actually improved and with that money that we got from that pre-purchase money or that rent to own money, we were able to sell the house and come away a little bit better than we would have been. Another option if you're looking to buy a house and you don't have any income is getting a co-signer. Maybe you've got a family member with a steady income who's willing to co-sign on a mortgage to qualify for the loan. Again, you've got to understand the details of this, whether you're the co-signer or the person that's getting the money. If you're the one co-signing, I did a show on this as well.

And I'll put a link in the show notes for this one. You got to understand what that looks like. If you're co-signing, you better be able to make those payments in the event that the person you co-sign for can't make the payments, because you're going to be liable for that. And the last one I came up with here, and this one's a bit of a, I would call it an unusual or a different way to look at it.

And it's what's called a reverse mortgage. So if you're 62 or older, a reverse mortgage on a home you could own, you already own could potentially free up funds to purchase a new property. Now, this one is tricky. You got to pay attention to the details. And I went out and did some research and I found an article from the Consumer Financial Protection Bureau. Sounds like a big government entity, but they really did a great job of laying this out.

So I put a link to it in the show notes. And if you're thinking about doing that reverse mortgage on a home, you already owned to free up funds to purchase a new property. You can do it because, but here's the thing that you got to understand. You've got to have the cash, not the reverse mortgage because you already got that. For the down payment. And then once you do it, it works like a traditional reverse mortgage. You're not going to have a monthly payment.

So if you don't have income, that's not a big deal. Cause you don't have those payments. But again, I also did a show completely on reverse mortgages. So there's two things on this issue. We got a link to an article from the Consumer Financial Protection Bureau, and I've got a link to a show that I did all about reverse mortgages. Because you have to understand what you're getting into those. I'm not a huge fan of reverse mortgages, but they have their place if you understand the details. Now Debbie, all of these options have pros and cons. They just do. And we talked about that as we went through this, but if you have that dream of getting into that home, and you don't have income right now, take a look at each of these, use some consideration, but really understand what you're getting into and the last piece of advice here is find an expert to assist you. Don't do like John and his wife.

They don't have that breakdown when you go to do your taxes and realize you made a huge mistake. I never saw them again after I did their taxes that year. And it wasn't anything that I had done. I realized that they just had gotten terrible advice. I don't know if they got advice from somebody or maybe they saw something online about how to use your 401(k) and they thought wasn't that terrible?

They thought, listen, I'm not going to have a mortgage. I'm not going to have a monthly payment. We're going to own our home outright. So the idea, the front end was a smart idea. But the implementation was just brutal. So let's take a quick minute to recap. And if you've heard nothing else, you know, that buying a home without income is challenging but I hope I've given you some hope and telling you it's not impossible. As we talked about, you got to use careful planning, understanding and do some creative thinking because there are ways to make that happen even if you don't have income. Now, let me give you a preview for tomorrow's show. Tomorrow is going to be our tax talk Thursday. And I'm going to answer a question I got from a listener. And the question was this. Is it true that I can lose my passport if I don't pay my taxes? So stay tuned tomorrow because I'm going to blend some financial responsibility with civil obligations. And you can understand can the IRS actually take your passport if you don't pay your taxes. Now, maybe after listening today, you're feeling overwhelmed by your current financial situation. Maybe like Debbie, you want to buy that home, but you've got these financial challenges. Maybe you lost your job.

You got laid off. Maybe you're a little bit grayer in hair, like I'm getting to be, and you're having a hard time finding that job. Well, here's the biggest piece of hope I can give you an answer. You don't have to face it alone. This is why I do what I do. I'm here to help you. I can help you find financial freedom.

I can help you break the bondage of debt. Maybe it's just breaking the bondage of living paycheck to paycheck or trying to figure out, Hey Ralph, am I on the right path? And I do that at the same time by aligning it with your Christian values. That's my whole goal. Maybe you're feeling stuck like Debbie. Debbie's got this dream and she's watching her dream to own a home slip away. Maybe you're struggling with financial instability.

You're like Ralph, everything costs more, and I don't know how I'm going to make it. I'm truly living paycheck to paycheck. I'm feeling frustrated. I'm feeling hopeless. There is hope, and I can help you. Maybe you're a small business owner trying to balance personal finances with business needs. You got those bills to pay, but you need the money in the business and you're thinking, Ralph, I just can't figure out how to make this balance. I need to grow my business.

I need to keep money to reinvest in my business. But I've also got kids to feed, and I've got mortgages to pay, and I've got property taxes and every other thing. Maybe you feel like you're taking one step forward only to get shoved two steps back. But listen to me, there is hope. You can break free. You can achieve long-term success. And it all starts with booking a call with me.

Just go to askralph.com. Click on that banner ad that says, book a call and let's create a personalized plan for you because here's what I know. Your situation is unique. Your goals are unique to you. There's no cookie cutter. There's no one size fits all plan. You can't go watch a YouTube video or find some website or TikTok video that says here's five things to get yourself in financial hold or those things might help you. But what you really need is a partner.

You need somebody to make it simple and easy for you. He needs somebody to help you develop what I call a true financial roadmap. So, listen, don't let another day go by feeling stuck or overwhelmed. Let's create that plan. And let's set a path to financial freedom and at the same time, spiritual growth. And remember this. My passion is to help you achieve financial success.

This is why I do what I do. This is my mission field. This is my goal in life. This is where my journey is taking me. I plan these episodes. I turn on this microphone. I turn on this camera if you're watching this. I want to see you live out your dreams, because that is what fuels me. That's what helps me get up in the morning. And at the same time you're living those financial dreams,

I want to see you grow in your faith because that's what's really going to matter at the end. It's not gonna matter how much garbage you accumulate, how big your bank account is, how many cars you have, how many beach houses you have. I don't care about any of those things. And once you realize, once you get those base layers, things fulfilled, I was talking to somebody yesterday. And it all comes down to the hierarchy of needs. If you're not getting to the point where your food, clothing and shelter is paid for, you're never going to get to these things of feeling fulfilled.

You're never going to get to God's purpose in your life. So book that call with me, cause I know together we can master your finances from that Christian perspective. So as I always end the show, here's what I want you to do. I want you to stay financially savvy and may God bless you abundantly.

Narrator
00:20:04

Thank you for joining us on the Ask Ralph podcast. And with a simple click to subscribe, we'll invite you back to our next episode.

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