Home & Garden

‘Erratic income’ rule an unfair barrier?

Ed Fine’s recent rejection for a refinancing of his home loan wasn’t exactly like former Federal Reserve Chairman Ben Bernanke’s. But there are enough similarities to raise questions about current tight mortgage market standards and how lenders scrutinize applicants’ incomes.

At the very least, there are lessons for anybody who can’t document months of steady, predictable income, whether from salary, regular retirement fund drawdowns, or other sources.

Bernanke’s refi blow-up was widely publicized recently. He didn’t specify why he was turned down or by whom, but mortgage industry experts say most likely it was because he experienced a disruption in his regular employment income. He retired from the Fed at the end of January. Though reportedly he has since made $250,000 for a single speech, has a book contract and is a resident fellow at the Brookings Institution, his income pattern may not have fit the standard mold in an era of computer-driven underwriting.

Fine, 72, was turned down because of an irregular income pattern, and he’s steamed about it. The retired defense contractor lives with his wife in a house they own in Shalimar, Fla. The Fines also own a rental house in Northern Virginia and a rental condo in Shalimar. The couple’s regular monthly income of around $3,500 consists of Social Security and pension fund payments and rental income. They supplement that when needed by making withdrawals from their IRA, which currently exceeds $250,000. With high FICO credit scores and no delinquencies “ever,” Fine says, “we are not hurting financially.”

But, like Bernanke, the Fines couldn’t get through the refi hoops, even though their lender, Quicken Loans, solicited them to apply.

The rationale for rejection: The Fines’ sporadic drawdowns from their IRA could not be added to calculations of their qualifying monthly income. As a Quicken Loans official said in a letter to them, they could not show “consistent monthly draws from the IRA account.” This creates debt-to-income ratio problems, the Quicken letter said, because for income from retirement accounts to qualify, there must be “verification of regular receipt of drawdown income for two months, and verification that the payments will continue for three years.”

Rules like this, Fine told me in an interview, create unreasonable barriers for seniors and retirees who may have significant wealth tied up in stocks and bonds in IRAs that they prefer to tap only when necessary.

Fine calls it a new form of age discrimination, but lenders such as Quicken and Bank of America reject that charge.

Bottom line: If you are in or heading for retirement and may need mortgage money at some point, be aware of the industry’s rules on recurrent income flows. Lenders will not, as Fine found out, trust you to make intermittent drawdowns of funds when needed to pay the bills. You’ve got to do it consistently – and ideally, well in advance of any mortgage application.