This happens often to retirees who want to refinance their home or get a new mortgage. After their regular employment earnings are reduced in retirement, their monthly incomes drop. They could have a lot of money stored in IRAs and other investments, but for the purpose of a mortgage, they might not have enough income to qualify for a home loan. This is the definition of asset rich but income poor.
In some situations, the impression of having limited monthly income can create a serious problem for a retiree. Sometimes it can result in a rejection of the mortgage application.
For example, it is possible for a retired real estate broker to live in a million-dollar home and have a lot of retirement savings and have high credit scores. If they want to refinance their existing mortgage to a fixed rate, they can find that they may have trouble. This can be the case even if they have a flawless payment history and a plan to reduce what they owe on their home by $200,000.
Many bank personnel do not know how to handle a mortgage application from a retiree. They might question whether their post retirement income will support a mortgage at today’s interest rates. The application can contain a lot of information about his many financial assets, but many mortgage providers may not know what to do with them.
One of the reasons is that they did not know about the retired mortgage program options that are offered by Freddie Mac and Fannie Mae home loans, as well as some private lenders for retirees. These new loan options essentially re characterize large retirement assets into forms of qualified income for mortgage purposes. This may not require the withdrawal of any funds. Sometimes, if the bank personnel are better trained and have a higher level of experience, these well-off retirees could be easily approved in a few days rather than weeks and weeks.
The Fannie Mae and Freddie Mac programs are of two varieties. The first is to treat ongoing distributions from IRAs and 401ks as income that is OK for home mortgage applications. That is provided the withdrawals plus other types of income are high enough to amortize the loan and are highly likely to continue for the next 36 months. The other option is for people whose retirement funds have not been used yet. Loan officers are authorized to use your retirement account balance as the basis for what is essentially imputed income. That is money that is or will become available to you to supplement your regular monthly income when it is needed to make repayments on your loan.
Some loan officers have been successful in using these special loan options successfully and consider then a good alternative when clients have retirement assets but do not have enough traditional, eligible income. For example, a client with $2 million in mutual funds but not enough standard income to qualify for the mortgage he wanted could use a new program by Fannie Mae. Instead of pulling money from his accounts, he could produce qualifying income of $3900 per month with a formula that gives a discount of fund balances by 30% to protect against market fluctuations that could eventually devalue them. This amount was added to other income the person had to total the amount needed to support his mortgage application. Before getting too excited, educate yourself on the latest Fannie Mae requirements.
Some mortgage brokers say that while these Fannie and Freddie programs can be useful, they can be complicated. One of the biggest problems is the assets in some retirement accounts may not qualify if they are derived from non-employment related income. Another problem is that long term loans for seniors may be only 10 or 15 years. Payments on these loans will be much higher than a 30-year mortgage. Many people cannot afford the higher payments.
Popular Senior Home Loans
Senior borrowers also like the reverse mortgage, because they offer a unique opportunity for borrowers to get cash out of their home and have no monthly payment. Reverse mortgages provide homeowners with the opportunity to transform their home equity into cash income without the burden of monthly mortgage payments. While for some seniors, opting for a reverse mortgage can be a sound financial choice, it may not be the most favorable decision for others.
Apart from age, additional criteria for reverse mortgages comprise:
- Your residence must serve as your primary dwelling, indicating that you reside there for the majority of the year.
- You should either fully own your home or carry a minimal mortgage balance.
- There should be no outstanding federal debt, such as federal income taxes or federal student loans.
Upon obtaining a reverse mortgage loan, the ownership of your home stays in your possession. This page provides details on home equity conversion mortgages, which stand as the prevailing type of reverse mortgage for seniors.
Reverse Home Mortgage Warning
Engaging in a reverse mortgage amplifies your debt and has the potential to deplete your equity. Although the loan amount is contingent on your equity, you are essentially borrowing funds and compensating the lender through fees and interest. As interest accumulates monthly, your debt continues to escalate, consuming a significant portion, if not all, of your equity.
Moreover, a reverse mortgage may impose constraints on your future choices. Typically, repayment of a reverse mortgage is required upon your demise or relocation from the residence. Exhausting your equity could mean receiving nothing when the home is eventually sold by you or your estate. This situation might leave you financially constrained if you intend to downsize to a smaller residence, transition to an assisted living facility, or move to be closer to family. Learn more about the risks of reverse mortgages from the Federal Trade Commission.
The bottom line is, if a lot of your assets are tied up in investment and retirement funds and you want a mortgage based upon your income after you retire, you should ask your loan officer about these Fannie and Freddie options. Also, there are similar private lender options worth asking about.
References: Fannie and Freddie programs offer options to retirees seeking home loans
About RefiGuide
Bryan Dornan is a financial journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has founded several mortgage and marketing companies and has worked as a loan officer and mortgage broker in the industry for over 25 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, and Linkedin
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