Getting clients to the closing table
So first and foremost, it’s important to know that a mortgage broker is going to go through your client’s balance sheet with them or their net worth statement through the course of that discovery. They’re going to find out what type of assets your client has, what they don’t have, what kind of debts they have, all that good stuff.
Now, I’m not saying that I want to be involved in that process at all, but what I am saying is if your clients need a little help getting to the closing table with cash or they know that they’re going to be a little strapped during the closing, the transition from moving to one place to another, maybe they’ve gone through a relocation.
They know that they’re going to be buying a new home here and they’re going to access system access to some cash in creative ways.
So that’s where I can come in and help. So no one wants to talk about what’s listed as a preferred asset on any balance sheet.
And we don’t talk about it in terms of being a preferred asset, but it truly is. And here’s why. So we’re talking about permanent life insurance. So a permanent life insurance policy, each and every one of those is going to hold a cash value inside that plan. What it means is it’s an account that your client has access to or they can borrow money from their plan or sometimes even surrender part of the face value to get to know the loan rates on those are usually very low, but the interest is paid back to the client’s own account.
So they’re not paying the life insurance company. They’re not paying the bank. They’re paying themselves back. OK, so that’s the first thing there. The second thing is a lot of times if they’ve had that policy in force for an extended period of time, there’s going to be a significant amount of cash there. And so I want to give you an example of this. So a couple of years ago, I had a client come to me who had an existing life insurance policy that had been in force for an extended period of time. I’m talking like 30 plus years.
So this gentleman came to me and said, hey, I want to know a little bit more about my policy.
I want to see if I could take a loan against the cash value to be able to buy this property. OK, no problem. Let’s take a look at it. So he brought me his statement and at first glance, I went and was a little shocked. But this policy is so old and was so heavily funded that he had over five hundred thousand dollars in this cash value of this life insurance plan. Awesome. Absolutely. We can access that.
What are you looking to do? Well, he told me that he was looking to buy a commercial property in downtown Dallas and he wanted to take as much cash on the table as possible because it was a competitive bid situation. You want to make sure that he got the property?
No problem. So we talked through the list price was and what he really wanted to do as far as an offer goes. And we were able to pull out five hundred thousand dollars in cash that he could take to the table for this is property. Now, we had done this far in advance enough of the transaction.
He was able to access the cash before being in the conversation at financing time. So he had the cash on hand. It didn’t have to disclose where the money was coming from ahead of time. Make sense. Now, if you’re in the middle of that real estate transaction, you do have to disclose where the cash is coming from and they’ll see that they’re pulling it from a life insurance policy.
Not a big deal, just an additional disclosure that your client’s probably going to have to to account for in there with their mortgage broker. But more of the story here is that he was the only person that brought a whole cash offer to that table in that property, and therefore he got it.
So that’s a way that a mortgage broker is going to see that a client has a life insurance policy. They may or may not ask about the cash value. And that’s how, you know, you’re working with a good mortgage broker. And if they ask about cash value, they know and understand that if not, then they would never know that there’s that kind of cash sitting off to the side that your client could have access to.
So a big thing. So cash value, life insurance. The second thing is, I know that we’ve had a lot of relocations to the area. And so I want to talk through the four one K and IRA options that we have available to clients. So if your client is over the age of 15 and a half, they can, of course, access their own money without penalty from the IRS, without any additional fees or taxes on that. They will pay taxes in excess of what their basis is in the plan. But they have.
Access to that that value in their plan without having to pay additional penalties on it if they’re under 15 and a half, they still have some options in order to grab some of that money out of their foreign accounts, be able to pay themselves back over time because now they can have it withdrawn out of their paycheck or they also have the ability just to take a temporary loan for their four one K plan.
Now, very specific to each individual 401k plan. Again, this is something a mortgage broker is going to ask your client about. So they’re going to know that this asset exists there for a client.
But most of the time, a mortgage broker isn’t going to go any deeper into that conversation with them because they don’t understand the ins and outs of what options the client has available to them. OK, so I want to talk to each of those you this morning. So I’ve been with the company, have a 401k plan there.
Let’s say I have a couple hundred thousand dollars sitting in there for one plan I just moved and I’d like to use some of that money for my down payment. Not a problem. If this is the first time that you’re buying a home, you have access to what’s called first time home buyer Bowers first time home buyers exemption so you can borrow money from the plan and there’s not additional taxes or fees. You can do that penalty free.
So I know a lot of the times our clients are not people that are first time homeowners. That’s also not a problem. They still have options with their poor one, Katlin.
So next thing would be if they’re under fifty nine and a half and they still would like to borrow money from their four one K plan to use for the down payment in their home. Not a problem at all. What we would need to do in that case is again make sure that it’s something that they can do and can access in there for one K plan, figure out what amount they want to take out of that for one K plan and then come up with a plan for them to repay that within a specific amount of time.
And that varies based on plans. So as an example, I had a client very recently who needed to take some money out of their fallen plan in the form of a lump sum to use as a down payment. So they did that. They took the money out. But the plan required that if we took the loan out, it had to be back in the plan within the first forty five days.
Not a problem for them at all because they put the money down and then in the very short period of time they were going to be able to access the cast of cash from another asset to be able to cover that and put that money back in the home.
So in that case, it worked really well for that client. Not an issue at all. So few options that are available for one plan, one, if they’re over 15 and a half, they can access that cash without penalty, sometimes without additional
taxes being taken out. Just depends on the plan and what they have going on. Their second thing, they can use the first time home buyers assistance, which gives them an exemption from a taxes or penalties with the IRS. And then the third one is they can actually take a loan from there for one plan.
Again, plan specific involved in all of these as to how they can borrow from the plan and then return the money to it. So I can work through that with your clients as well to make sure they have a full understanding of that.
And then the third way that I can help is, again, a mortgage broker is going to see on the balance sheet that a client may have an annuity or sometimes other investment asset. In those cases, there are going to be individual rules for each type of plan, and it’s going to vary based on which company they have it with.
But I can dig a little deeper and say, you know what, you have an annuity. It’s not tied to a company pension plan. Let’s investigate it and see what we can do.
Most annuities today offer a 10 percent withdrawal that’s that’s without penalty to them, especially if they’re over 15 and a half. They can access that cash at any point in time. So that’s another situation where mortgage brokers are going to see the asset on the balance sheet. They may not know the ins and outs of the plan, and they definitely can’t help your client access it.
But that is some place where I can step is step in as a financial adviser and help them walk through that process, make sure they fully understand the implications of using those assets and hopefully bring them to the closing table in a much better place for you.