Weekly Rate & Market Update 2-10-17
Question: Can I use my assets for income?
Answer: Possibly.
This question comes up from time to time with high net worth individuals who do not have a lot of income—perhaps they get retirement income or other payments that are not enough to qualify for a mortgage, but they have significant funds in investment accounts.
Fannie Mae and Freddie Mac both have formulas to use asset accounts for income. The qualification process has several moving parts and I will see if I can clarify. Note that using assets for income is limited to owner occupied 1 and 2 unit properties with a maximum of 80% loan to value for a purchase or rate and term refinance (65% if taking cash out).
The first step is to determine if the account(s) that is being used for income qualifying is a retirement account or a “normal” account that is subject to taxes for capital gains, interest and dividend payments.
If the account is a retirement account, an IRA or 401(k) for example, then we must then determine if you have started taking annual distributions. If you are over 70 ½ then you are obligated to take minimum distributions based on tables provided by the IRS.
If you have already begun taking distributions then whatever amount you have already taken annually will be used for your income, unless you can show that an automatic payment of a certain amount has been set up and in place with your account holder. As well the account must have sufficient funds to show payments for five years. For example if you have an IRA with $500,000 and for the past two years you have taken out $24,000 then we will credit you for $2,000 per month in income.
If you have not yet begun taking distributions and are not yet obligated to do so then we apply a formula to your retirement account to calculate the amount used for income. First we determine if you will be assessed a 10% early withdrawal penalty by the IRS if you are under 59 ½ years old. Then we calculate if you will need any of the funds for down payment or closing. Then we determine if the funds are held in cash or stocks and mutual funds.
For simplicity sake let’s assume your account has $500,000 in it, you are 62 years old and the funds are fully invested in mutual funds, your funds for closing are coming from the sale of a current residence so you do not need the IRA for cash to close.
The first step is to multiple the balance by 70% to account for potential swings in the market in the future: 500,000 x .70 = $350,000.
We then divide the amount by 360 to get monthly income: 350,000 / 360 = $972.22 is the qualifying income.
What if your funds are in a “normal” account? First the funds must be seasoned for more than one year. So if you inherit a large sum of money or win the lottery you must wait to use the funds for qualifying income.
Then the same rules apply for qualifying, if funds are invested then use 70% of the balance then divide by 360 months. In some cases we have a client with a large amount of funds in cash as well as invested in this case we split the calculation.
Let’s assume you have $100,000 in cash and $400,000 invested. In this case we add the $100,000 to 70% of $400,000 = 100,000 + (400,000 x .70) = $380,000.
Divide by 360 and we get monthly income = 380,000 / 360 = $1055.56 per month.
If you or a family member is considering buying a new home, or needs to refinance their current home, and may be tight on income, give me a call and we can work through all the numbers, including assets, to determine if we can increase the qualifying income using retirement or other asset accounts.
Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.
Rates for Friday February 10, 2017: Very little economic news this week that impacts mortgage rates. Most of the movement in rates this week were tied to the equity markets as investors moved their money between bonds and stocks. There was some movement during the week but we end up this Friday flat from last Friday and the Friday before. Ah, some stability…
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 4.00% Flat
30 year high-balance conforming 4.125% Flat
30 year FHA 3.50% Flat
30 year FHA high-balance 4.00% 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 (3.5% for FHA) with 740 FICO score for purchase mortgages.
Our student from France, Mallory, is still with us and ready to take us on a Southern California tour. The kids have Monday off so this weekend the plan is to explore LA, possibly Venice Beach, Santa Monica Pier, Rodeo Drive, cruise down Sunset to Malibu, and then on Monday they will head up to Universal Studios while I recover back at work! I hope you have a great weekend wherever you are!
Have a great week,
Dennis
