A little-known change in Freddie Mac’s rules could be a big help to qualifying retiring Baby Boomers and other savvy homebuyers who have limited incomes, but substantial financial assets, for a low-rate conforming, conventional mortgage.
Without a steady income, how do they qualify for a loan? By utilizing assets as income, that’s how!
Loans backed by Fannie Mae and Freddie Mac — which means most loans issued these days — can use assets such as IRAs and 401(k)s to help applicants meet income requirements. The provision “lets you take
advantage of your holdings to a greater degree,” says Keith Gumbinger, vice-president of HSH Associates, which publishes mortgage information and rates.
How Does It Work?
Assets that can be counted under these rules include retirement accounts such as IRAs and 401(k)s, lump-sum retirement account distributions and annuities.
“The borrower must be fully vested, and the retirement assets must be in a retirement account that is immediately accessible,” says Brad German, a spokesman for Freddie Mac. That means the money cannot be subject to an early-withdrawal penalty and cannot currently be used for income.
The formula takes 70% of qualifying assets, subtracts what will be needed for down payment and closing costs and divides the remainder by 360, the number of months in a standard loan, to arrive at a monthly income used to determine the applicants’ maximum payment and loan amount.
HSH.com says, for example, that a borrower with $1 million in assets could count $700,000. After taking out $10,000 for closing costs and dividing by 360, the borrower could show $1,917 in monthly income.
That, of course, is not enough for a gigantic loan. But it could be very helpful if the borrower needed a relatively modest loan for the gap between the cost of a new home and the proceeds from selling an older one. And Social Security, pension and other income sources could help the borrower get a bigger loan.
There are some catches, however. To be counted, the assets, including interest earnings and dividends, cannot be used for current income, HSH says.
If you would like to find out more about utilizing your assets as income for your next home purchase or refinance, reach out to your mortgage lender for more details.
The views expressed are my own and do not necessarily reflect those of American Financial Network, Inc.
