A change in Freddie Mac’s rules could help retiring baby boomers, and other home buyers with limited incomes but substantial financial assets, qualify for low-rate conventional mortgages.
Freddie Mac, the giant mortgage finance company, actually changed the rule two years ago. But many borrowers and loan underwriters are apparently unaware of it, according to a blog post on the company’s Web site.
Why would someone near or in retirement want to take on a mortgage? They may want to refinance an existing loan at a lower rate. Or, they may want to sell and downsize to a smaller property. The slow housing market and depressed home values have made that difficult for some, until recently.
Now, the housing market is improving, values are rebounding, and interest rates are still relatively low. Those improvements, plus the more expansive income eligibility criteria, may help more people move into new loans, said Brad German, a spokesman for Freddie Mac.
“Perhaps someone was waiting for home prices to come back so they could sell their home and responsibly combine part of the sale proceeds with a mortgage to buy a smaller home or a retirement home,” he said in an e-mail.
The change allows lenders to take into account a significant portion of a borrower’s financial assets when determining if their income qualifies them for a Freddie Mac mortgage. (Freddie Mac doesn’t make loans directly; rather, it buys them and pools them for sale to investors, and guarantees them against default.)
For instance, under the new guidelines, a portion of assets like individual retirement accounts (I.R.A.’s) and 401(k)s can count toward a borrower’s income eligibility.
The assets must be in a fully vested retirement account recognized by the Internal Revenue Service, and they can’t be subject to a withdrawal penalty. (The change doesn’t apply to accounts that are already being tapped, since that means they’ve already been taken into account in the borrower’s income.)
To determine eligibility, the lender adds up the eligible assets; multiplies the total by 70 percent; and subtracts the funds needed to complete the transaction, like down payments, closing costs and escrows. Then, the remaining amount is divided by 360 months, and counted toward the borrower’s monthly income.
Say you had an I.R.A. worth $100,000 and a down payment of $20,000, leaving $80,000 in assets to be used to determine your income for qualifying purposes. Seventy percent of $80,000 leaves $56,000, which is divided by 360 months, leaving roughly $155 a month added to your income.
The assets are separate from dividends, interest payments, trust distributions and Social Security payments, which have long been eligible for consideration when calculating a borrower’s qualifying income.
The new requirements are “a potentially big deal” for many prospective home buyers, including the “rapidly growing” population of retirees and near-retirees who would like to buy or refinance a home, Freddie Mac says.
“We want to make sure people know about this option,” Mr. German said.
Would this rule change help you obtain a mortgage?
Article source: http://bucks.blogs.nytimes.com/2013/05/24/a-freddie-mac-change-may-help-some-borrowers/?partner=rss&emc=rss
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