Here’s a heads-up for the seniors whose post-retirement monthly incomes aren’t enough to qualify for a mortgage under today’s tough underwriting standards.
A little-known policy revision now allows seniors and others to use certain retirement account balances to supplement their incomes for underwriting purposes without actually tapping those balances or drawing down cash, say top credit officials at Freddie Mac.
Freddie Mac’s plan offers seniors a boost to qualifying income if their financial assets permit. (Fannie Mae, the other big mortgage investor, offers a similar option.)
Let’s say you have $800,000 sitting in a retirement account that hasn’t been touched yet and that can be accessed with no IRS penalty. Under Freddie’s guidelines, the loan officer could use your $800,000 in untapped retirement assets as follows: First the lender essentially discounts the $800,000 to allow for possible market swings. Freddie Mac requires loan officers to multiply your retirement fund assets by 70% for a conservative estimate of worth. This brings your retirement funds — for underwriting purposes — down to $560,000 ($800,000 times 70%).
Next, the underwriter divides the discounted fund balance by 360 to arrive at what is essentially 30 years’ worth of monthly draw-downs from the fund — in this case, $1,556 ($560,000 divided by 360 equals $1555.56). The lender then can add the $1,556 to your current Social Security, pension and other verified qualifying income for the purpose of computing your debt ratio. You may never withdraw your retirement funds to pay the mortgage, but the fact that you have easily accessible financial assets available to do so allows the change to the underwriting equation.
The calculations can get a little complicated, with some technical rules and definitions that lenders are required to follow. Nothing is simple – consult your lender.
If you are already taking money out of a retirement account, procedures are a little different. Retirement-related financial assets can include lump-sum distributions you’ve received or even the proceeds of the sale of a business.
Bottom line: If a debt-ratio problem is preventing you from getting a new mortgage, but you’ve got substantial untapped retirement funds that might help you qualify on income, don’t take no for an answer. For underwriting purposes, you may have more income than you thought.
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