Retirement funds hurt mortgage plans
WASHINGTON — It's a mortgage problem that is likely to intensify as homeowning baby boomers by the millions shift into retirement: Though they may have significant financial assets in retirement accounts, their diminished monthly incomes may not be sufficient to meet some lenders' hyper-strict underwriting rules.
Jim Eberle of McLean, Va., found this out the hard way when he applied to refinance his mortgage. After spending much of his career working for banking industry trade associations in Washington, Eberle, 68, decided to take advantage of this spring's unprecedented low interest rates with a 2.89 percent adjustable-rate 30-year loan offered by a large Midwestern bank.
Eberle was rejected — the first time in 45 years of homeownership and eight different home loans. The reason for the turndown: insufficient income.
Eberle had substantial checking, savings and 401(k) holdings and a net worth he describes as "in seven figures." The appraisal the bank did on his house showed it to be worth $664,700 — more than double the $322,000 refi he was seeking. His credit score, according to TransUnion, was 826, indicating minimal risk of default.
Yet the bank "told me it could not make the loan because, even though I have sufficient (liquid) assets and a high credit score," his monthly Social Security payments, bank deposits, checking accounts and 401(k) plan "were not enough," Eberle says.
Mortgage market experts, such as Dennis C. Smith, co-owner of Stratis Financial in Huntington Beach, Calif., are not surprised at Eberle's experience. Part of the problem, according to Smith, appears to be overcorrections by some banks to the lax underwriting that characterized the years leading up to the housing bust. But another factor, says Bruce Calabrese, president and co-founder of Equitable Mortgage in Columbus, Ohio, is that some loan officers aren't aware of techniques available for qualifying retirees who are asset-rich but income-deficient.
For example, Calabrese's firm employs "annuitization" procedures acceptable to Fannie Mae to help borrowers over 59 1/2 qualify on income tests using their IRA and other retirement account balances. "We take 70 percent of the total value of the funds and then spread them out over 360 months if the loan is a 30-year fixed and 180 months if the loan is a 15-year fixed. We also gross up their Social Security by (a factor of) 1.25. So if they get $1,000 per month in Social Security income, we give them credit for $1,250 as long as they don't have to pay income tax" on that income.
Some of the computations can get complex, but the message here is clear: You need to shop around and deal with experienced loan officers who know the ropes and are willing to work with you for your business.