WASHINGTON — 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. Many of these seniors have seen their monthly incomes — heavily dependent on Social Security and limited pension plan payouts — plummet after retirement. Yet on paper, they look fairly comfortable. 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.
Freddie Mac — and Fannie Mae, with a similar option for seniors — offers them an 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 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.
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.
Under Freddie's guidelines, the loan officer could use your $800,000 in untapped retirement assets 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 — to $560,000.
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 to compute your debt ratio.
You may never have to draw down even a dollar from your retirement funding to pay the mortgage, but the fact that you have easily accessible financial assets available to do so allows the change to the underwriting equation.
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.
The bottom line: If a debt-ratio problem is preventing you from getting a new, low-interest-rate mortgage, and you've got a substantial untapped retirement fund 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.