WASHINGTON - 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.
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. For 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.
Contact the writer: kenharney@earthlink.net