Mortgage investment giants Fannie Mae and Freddie Mac have eased rules to allow retirees the use of “imputed” income — or potential earnings over a period of time — from 401(k), IRA and other retirement assets to qualify for a home loan.
The changes can help seniors qualify for a mortgage to downsize into a new home or refinance via currently low interest rates.
The Washington Post reports on credit these underwriting changes initiated by Freddie Mac (Fannie Mae has similar options). The revised rule comes as an estimated 8,000 baby boomers a day are entering retirement.
“Imputed income” refers to the potential monthly earnings that can be tapped from a retirement account over a certain number of years.
Many seniors depend on Social Security, and even fewer have limited pension plan payouts, which might explain the rise in retirees launching businesses for extra income. But these income sources often are insufficient to qualify for a mortgage or refinancing.
However, many new retirees have growing IRA and 401(k) retirement account balances that have seen the benefits of record-setting stock market gains.
Let’s say that you have $800,000 in a retirement account that is untapped and can be accessed with no IRS penalty.
Under the Fannie and Freddie policy changes on qualifying income standards, you monthly income could actually be higher for underwriting purposes based on the potential of that $800,000.
According to the Washington Post example, a loan officer could use the $800,000 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.