Can we get a mortgage with low income but a lot of assets?

Question of the week: Can we get a mortgage with low income but a lot of assets?

Answer: This question comes up more frequently every year, especially as more and more baby-boomers are retire(d)(ing).

More and more people have transitioned from employment income to retirement income from pensions, social security, distributions from their retirement accounts. They want to refinance their existing home, or sell their home and down size.

Their income has drastically reduced in retirement; however, they have very significant retirement, savings, and/or investment accounts. With their lower income they do not qualify for the mortgage they wish to obtain.

“How can we no qualify? We have enough money in our accounts to pay off the loan we are applying for?”

In 2010 the Dodd-Frank Act was passed as a result of the real estate and mortgage market melt downs in 2008. There were many purposes for the Act, as exhibited by its 2300 pages and over 400 new rules and mandates. One purpose was to change the mortgage industry to eliminate, or greatly reduce, the number of mortgages that had no-income qualifying, no interest only payments, no negative amortization, by creating guidelines for “Qualified Mortgages,” or QMs.

If lenders want to sell their mortgages on the secondary market, i.e. to Fannie Mae or Freddie Mac, there are some guidelines that must be followed. One of which is that mortgage applicants must show the ability to repay the mortgage on a monthly basis; i.e. they must show monthly income that would support the mortgage payment, their other debts, and remain with in the 45% debt-to-income ratio mandated as part of the QM statute. (Debt-to-income, or DTI, is your total housing payment plus your credit obligation divided by your gross income.)

Based on this the QM guidelines, many retirees, or non-retirees, who have significant assets but limited monthly income, do not qualify for conventional mortgages.

Let’s take and example of Linda, whose is 74 years old. Linda is looking to refinance her $500,000 mortgage with a 30-year fixed rate mortgage, with a 3% rate and a payment of $2108 per month. Adding her taxes and insurance of $750 per month, Linda’s housing payment (PITI) is $2858 per month. She also $750 per month she is paying for a car payment and some credit card balances.

Her total obligations for qualifying are $3358 per month. Using the maximum DTI ratio of 45%, Linda needs monthly income of $7800 or more per month.

Linda worked in several industries in her career and owned her own event planning business for several years. She was frugal but not cheap, which enabled her to save for retirement, as well her parents passed away several years ago and left her a nice inheritance.

Linda is receiving $3200 per month in Social Security income, and draws $2500 per month from her rollover IRA account. The IRA has a balance of $750,000 and she also has an investment account with $1,200,000 that is mostly in mutual funds.

Her monthly income from her Social Security and IRA total $5700 per month. As we saw above, she needs $7800 or more to qualify for the $500,000 refinance. Based on her income she does not qualify.

But she has almost $2 million in semi-liquid assets, how can a lender not loan her the money?!?

Some lenders will not, but some lenders who know the regulations of Fannie Mae and Freddie Mac know that their guidelines have a formula by which assets such as retirement accounts, and/or savings/investment accounts, can be converted in income for qualifying purposes.

We call this asset depletion; the formula is applied that calculates depleting the assets over twenty or thirty years on a monthly basis this can be used for income.

To simplify, since Linda is drawing from the IRA, we will not use that account. However, with her investment account, because it is in mutual funds the calculation takes 75% of her balance, which is $900,000, and divide that by either 240 months (Freddie Mac) or 360 months (Fannie Mae).

Using Freddie Mac, the math results in $3750, which is what we use as qualifying income.

Linda’s qualifying monthly income is now $5700 she receives every month from Social Security and her IRA, plus $3750 from the asset depletion calculation, for a total of $9450.

She qualifies for the mortgage of $500,000 she is applying for to reduce her monthly payments.

There are several restrictions on this form for qualifying depending on the lender, and type of transaction. Before taking out your asset statements and calculator to determine if you can qualify, call a loan expert, especially one who is familiar with this type of qualifying, to run the numbers for you.

Click the Ask Me link below to get in touch with just such a lender.

Have a question? Ask me!

Economic growth continued in March as evidenced by strong increases in retail sales, up 9.8%, and the Consumer Price Index, up 0.6%. Part of the surge is tied to another round of stimulus checks, however, most of the growth is attributed to more and more of the economy opening up. In my opinion, the large increases in spending, continued upward pressure on prices and increasing employment must come through to higher inflation; the Federal Reserve does not agree with me. Which is a good thing for mortgage seekers as the Fed’s opinions obviously matter more than mine.

Rates for Friday April 16, 2021:  Rates remain flat from last week, despite, as stated above, economic news that should be pushing rates higher.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.75%  Down 0.125%

30 year high-balance conforming                   2.875%  Down 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Last weekend provided a wonderful exhibit in strength, mental and emotional. For those who don’t follow golf, last weekend was The Masters golf tournament, one of the four “majors” for men’s professional golf. Saturday. It has an international field and going into this weekend has had winners from eleven nations. Starting the 3rd round (there are four rounds), Hideki Matsuyama, from Japan, was three strokes behind the leader, Justin Rose form England.

Of the eleven nations who have had a golfer win The Masters, Japan is not one of them. In fact, no Japanese player has won any of the four men’s majors.

Golf is a very big sport in Japan. They have more driving ranges per person than any other nation. Japanese golfers travel around the world to play the game. Japan also has a very aggressive press that has a history of putting a lot of pressure on their sports stars—ask Japanese baseball players who have come to play in the United States.

At the end of play on Saturday, Matsuyama led the tournament by four strokes over four players, tied for second place. In golf, they like to say that it is tough to go to sleep on Saturday night leading a major, especially the Masters. It is even tougher if you are a young golfer from Japan trying to become the first person from your country to win one of the most prestigious tournaments in the world.

Matsuyama slept well enough. Despite some miscues as he played the final nine holes, despite the immense pressure of not only winning his first major, but being the first Japanese player to the Masters or any other major, despite immense nerves as he teed off to start the day, Matsuyama held it together long enough to sink his final putt, to win by one stroke.

He smiled, and waved at the crowd, and as he took the long walk from the 18th green to the clubhouse to sign his scorecard, his face and manner changed as the enormity of what he had accomplished slowly hit him. He was coming to the realization that his life has changed forever, his is not only a major champion, a Masters champion, but a national hero who will always be known to anyone in Japan who plays golf.

I love sports for many reasons. Sunday afternoon watching a young man carry his nation on his shoulders with what could be crushing expectations to the finish line was one reason I love sports. Congratulations to Hideki Matsuyama and the people of Japan.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog