Here's a heads-up for the growing ranks of seniors whose post-retirement monthly incomes aren't sufficient to qualify for a mortgage under today's tough underwriting standards: Thanks to a rule change by the largest players in the home loan business, you may be able to use imputed income from your 401(k), IRA and other retirement assets to qualify for the loan you want.
That, in turn, could open the door to a money-saving refinancing to a lower-rate loan or a downsizing purchase of a new house or condo.
Top credit officials at Freddie Mac - the giant federally controlled mortgage investment company - said last week that 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.
Freddie's revised rule is aimed at the tidal waves of baby boomers heading into retirement status - 8,000 a day for the next 18 years, according to one industry estimate. Many of these seniors have seen their monthly incomes - heavily dependent on Social Security and limited pension plan payouts - plummet following retirement. Yet on paper, they look relatively comfortable financially. They've got growing IRA and 401(k) retirement account balances, swelled by recent stock market gains. They often have solid equity in their homes, good credit scores and at least modest savings.
But if these same people apply for a refinancing or a new mortgage to buy a home, suddenly they're told they don't look so great. They often can't qualify under the "debt-to-income" standards required for today's post-recession underwriting. Those rules sometimes set the bar for total household debt-to-income too low for retirees who are still making payments on auto loans, credit cards, home equity lines of credit and other debts.
Freddie Mac's plan - and Fannie Mae, the other big mortgage investor has a similar option for seniors - offers them a little extra boost on qualifying income if their financial assets permit. Take this hypothetical example provided by Freddie Mac credit officials: Say you'd like a new, low-interest rate mortgage but your debt-to-income ratio doesn't make the grade. You do have $800,000 sitting in a retirement account that you haven't touched yet and that could be accessed by you with no IRS penalty.
The good news: Under the federal mortgage investors' policy change on qualifying income standards, your monthly income could actually be higher for underwriting purposes than it appears to be at first glance.
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 take into account possible market swings that could reduce what you actually have available. Freddie Mac requires them to multiply your retirement fund assets by 70 percent to arrive at a conservative number. This brings your retirement funds - for underwriting purposes, of course - down to $560,000 ($800,000 times 70 percent).
Next, the underwriter divides the discounted fund balance by 360 to arrive at what is in effect 30 years' worth of monthly drawdowns from the fund - in this case, $1,556 ($560,000/360 equals $1,556). 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 have to draw down even a dollar from 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 computations can get a little complex, and there are some technical rules and definitions that lenders are required to follow. For example, if you are already pulling down dollars from a retirement account, procedures are a little different. Another example: Retirement-related financial assets can include lump-sum distributions you've received or even the proceeds of the sale of a business. Loan officers and underwriters unfamiliar with the program can consult Freddie's (or Fannie's) online technical guidance for more detail.
But the bottom line is this: If a debt-ratio problem is preventing you from getting a new low-interest-rate mortgage, and you've got substantial untapped retirement funds that might help qualify you on income, don't settle for a rejection. You may have more income - at least for underwriting purposes - than you thought.
Kenneth Harney's email address is firstname.lastname@example.org