8-17-18: We are retired, how do we qualify for a mortgage?
Question of the week: We are retired, how do we qualify for a mortgage?
Answer: It may be my client base is aging, or it may be that I am fortunate to have more retirees referred to me for assistance with their mortgages, it is probably both, but we are funding exponentially more mortgages for retirees every year. Qualifying income for loan approval is a bit more challenging for retirees than for a younger couple with both spouses working “regular,” salaried jobs. Back to our question, how do we qualify?
It is important to note that the vast majority of mortgages are “QRM” designated loan products. Qualified Residential Mortgages came about after the Dodd-Frank Act was signed into law in June 2010 by President Obama. The purpose of the QRM designation was to ensure that banks either funded mortgages for applicants that could prove the ability to make the monthly payments, i.e. show income that supports the mortgage payment. If lenders fund a loan that does not fit the QRM criteria the lender must retain at least 5% of the total non-QRM mortgages they fund, or in the parlance of the times, have skin in the game and face loss if mortgages default.
Simply put, a 30 year fixed rate mortgage through Fannie Mae, Freddie Mac or most jumbo loans, is a QRM designated product and as such applicants must prove they have the ability to make monthly payments.
Many retirees have multiple sources of income plus assets. Our objective when working with retirees purchasing a new home or refinancing an existing one is to put together a mortgage package that shows “ability to repay” under the guidelines for qualifying income as set for by Fannie/Freddie or the jumbo investors using the available income and assets.
Some income is easy to show, prove and qualify. First and foremost is social security income, which is easy to verify as recipients receive a letter detailing the benefit, almost all social security payments are made via automatic deposit into recipient’s checking account and finally the total benefit received and the taxable amount of the benefit are seen on tax returns. Constant, continuing and verifiable, social security income is as good as it gets for qualifying income for a mortgage.
Pension income from a prior employer or union is another excellent source of qualifiable income for retirees for the same reasons as social security: there is usually a benefits statement indicating the annual income, it is reported on tax returns and it shows on your bank statements. A few wrinkles for some lenders, are showing you have received the income for the prior six months and/or verifying it will continue for at least three years. It is rare, but there are some pension plans where recipients are paid only ten, fifteen, twenty, etc…years after retirement.
Another constant and continuing source of income for some retirees are monthly or payments from an annuity or life insurance policy. This income can be used by verifying the amount, that the income received will be a regular amount and that there is sufficient assets in the policy to ensure payments for at least three more years.
A primary source of income for retirees are drawing down of assets from retirement or investment accounts. The two different types of accounts are handled differently by different types of loan products and lenders.
The most common asset owned by retirees is some type of retirement account, generally an IRA that consists of funds accumulated while working and paid tax free into a 401(k) or other type of retirement account. One of the best parts of the U.S. tax code is the ability to make tax free contributions to a qualified retirement account while you are working, meaning the income you divert to the qualified account is not taxed as income. In addition, as your account grows through compound interest, dividend reinvestment and capital growth. Because the account grows with no taxes being paid, when you do withdraw funds from the account they are taxed as ordinary income. Also, because you have not paid taxes on the funds the government feels that at some point taxes should be paid so when you turn 70 ½ and have a qualified retirement account you must begin taking “Required Minimum Withdraws” (RMD) from the account. There is a formula that is used based on your age and account balance that determines the RMD you must take each year. These withdraws, or payments, from your retirement account are taxed. And they also can be used for qualifying income for mortgage purposes.
Some retirees only take the RMD from their retirement account(s), others set up a regular monthly, quarterly or annual payment that is greater than their RMD as their expenses exceed what they would receive by just withdrawing the required minimum. If you have a regular withdraw amount established that amount is what most lenders use as qualifying income provided you can prove the amount is constant and also that you have at least three years of withdraws in your retirement account using a formula.
One last potential source of income we will discuss in detail is if you have a large amount in cash or investment accounts that are not retirement accounts but money you saved, inherited or are the proceeds from the sale of other assets. In certain instances we can use a process called “asset depletion.” Asset depletion guidelines enable us to take a percentage of these assets and then divide by the total number of months in your applied for mortgage to obtain a monthly income amount. For instance if after going through the calculation process to determine how much of your account is eligible for qualifying income we arrive at $360,000 of your investment account is eligible for income. You are applying for a 30 year mortgage, which is 360 months. We divide the $360,000 eligible amount by the 360 months of payments and credit you with $1000 per month for income for your mortgage application.
Some other sources of income for retirees are rental income, distributions from an inherited IRA or annuity or income from employment—perhaps some consulting work you do ten to fifteen hours a week or filling your time as a greeter at WalMart or working at the library.
Finally, if you want, or need, to sell your current home and purchase a new one or refinance your existing home and are not able to qualify for a traditional mortgage, I suggest you explore a reverse mortgage if you are eligible. This is a topic I have covered in the past and will revisit next week as I feel it is an excellent financial tool for many homeowners.
If you are retired, or someone you know is, and are wondering what options you may have regarding your current mortgage situation or perhaps downsizing to a new home, please contact me to review your financial information and determine how you can qualify for a new mortgage and how much that mortgage might be.
Have a question? Ask me!
Seventy percent. That is the estimated amount that consumer spending contributes to our nation’s economy. Based on retail sales numbers from July the third quarter could be another quarter of strong growth as spending increased 0.5% in July from June, which was 0.2% higher than May’s spending after being revised down from the original 0.5% estimate last month. Since consumer spending is the biggest factor in our economy strong retail sales mean a strong economy which means higher rates.
More for less. Another sector of the economy showed very strong growth in the 2nd quarter: productivity, which was up 2.9%, the biggest gain in more than three years. Not seeming to benefit from the increase were the workers creating the output as the amount of time workers worked increased just under 2%. Showing the biggest increase in four years was output, the goods and service produced, which jumped 4.8% in the quarter. Productivity is output (4.8%) less hours worked (1.9%) totaling the 2.9% growth. The lower rate of growth in hours worked compared to the growth in output is a result of the very tight labor markets, it is easier to increase the hours of existing workers than it is to hire new workers to increase output. This formula can only last for so long however as there is a limit to the amount of output a static set of workers can produce. The news is negative for interest rates.
Rates for Friday August 17, 2018: Rates hung on to last week’s dip this week. Shrugging off the positive economic news, investors are a bit concerned with some of the economic news from China and Turkey, and of course very cautious due to the tariff issue still hanging about.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:
30 year conforming 4.375% Flat
30 year high-balance conforming 4.50% Flat
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.
Big Friday night as many top high school programs kickoff their season tonight. With both the girls going to Long Beach Poly, and the older being in the marching band for four years, I have come to really enjoy the Friday night games and atmosphere. We are fortunate in Southern California to have so many great schools that have rich traditions in academics and athletics. If you are a high school sports fan, I hope your teams have great seasons with competitive contests, no injuries and growth for the young men and women participating.
Have a great weekend,
Dennis
