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For seniors, a break on mortgages

Kenneth Harney
Kenneth Harney, who lives in Washington, D.C., writes an award-winning column on housing and real estate.

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.

Many retiring seniors have seen their monthly incomes – heavily dependent on Social Security and limited pension plan payouts – plummet following retirement. Yet on paper, they may have 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 they apply for a refinancing or a new mortgage, 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.

The computations can get complex, and there are some technical rules that lenders are required to follow. For example, if you are already pulling down dollars from a retirement account, procedures are a little different.

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.
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