What Every Retiree Needs to Know About Employment-Related Assets and Mortgages
It’s a problem that many new retirees experience.
You just celebrated one of the most important accomplishments of your life, you have great credit, and excellent assets; you should be a top-notch candidate for a mortgage loan.
But because you just retired, you technically have a small income. Suddenly, and inconceivably, you can’t get a loan!
Fortunately, Fannie Mae has laid out guidelines for using employment-related assets as qualifying income, and this can be especially useful for both new retirees and people who are retiring soon.
Using Employment-Related Assets as Qualifying Income
First of all, the lender will need to get you qualified for the specific mortgage. He or she will go through this step in many ways, but they will generally follow a process that helps ensure your mortgage is approved. Previously, you would have to be over 59.5 years of age and 70.5 years old. Now, however, you are now longer required to be in any age bracket to use employment-related assets as qualifying income.
To get things going, the lender will need to verify that you have unrestricted funds in your retirement account, which should not include checking or savings. By “unrestricted,” we basically mean that you can access the money when you need it, and you don’t have to go through a complex release or approval process to utilize the funding.
The assets you are using to qualify must be liquid (available when you need it) and sourced as either a non-self-employed severance package or lump sum retirement package. The funds will need to be properly documented with a distribution letter from the employer and must be deposited into a verified asset account.
If it is a 401(k), IRA, or Keogh retirement account, you must have unrestricted access to the funds in the account. The account must also be documented with the most recent monthly, quarterly, and annual statements.
Also, the employment-related assets that you are going to use will need to be individually owned. The only exception is if you share the loan with your spouse; in this case, you and your spouse must both be listed on the loan documents.
Understanding the Allowable Transaction Types
When using employment-related assets as qualifying income, there are only a few loans that you have available to you from Fannie Mae. The loan will need to have a 70% loan-to-value ratio. In other words, only 70% of the property value can be funded by the loan, and you will have to generate the remaining 30% as a down payment.
Because these loans have a little more risk (due to retirement incomes being lower than working incomes) lenders are required by Fannie Mae to ensure your credit score is at least 620 if you are using retirement-related assets as qualifying income.
If you meet the above requirements (30% down, 620 or higher credit), you can then look to purchase a primary or secondary home, or you can refinance your home. However, no cash-out refinancing is allowed with this program.
You can also use this program to purchase investment properties. With employment-related assets, you could purchase properties with up to four units.
Determining Your Monthly Income
The future of your income can be difficult to predict, and in order to reduce risk, lenders have to be conservative when estimating the amount you’ll be able to pay. To calculate your qualifying income, lenders will look at the total of all the qualifying accounts and reduce that amount by 30%. For borrowers under 59.5 years old, however, the amount will be reduced by 40%, which accommodates for early-withdrawal penalties. The 70% rule (the total you can use after reducing 30%) is important for lenders because it takes into account the financial risk involved in stocks and bonds. These assets could go down in value, so the total is reduced by 30% to compensate for this potential loss.
Here’s an example of how if might work: Say you have $500,000 in retirement accounts made up of an IRA and 401(k). The lender would reduce this amount by 30%, which would leave you with $350,000. This $350,000 is the net documented useable assets, and this total will be used to determine monthly income.
Other Factors to Consider When Using Employment-Related Income
Sometimes you may have penalties that would apply to the distribution of your funds. For example, if you withdraw from an IRA before reaching a certain age, you could have added penalties. To account for these penalties, an amount must be subtracted from the total to determine the usable income for qualification.
Some Assets are Ineligible
As you seek mortgage approval with your employment-related income, you will find that certain assets are ineligible for use. For example, stock options, non-vested restricted stock, lawsuit claims, lottery winnings, real-estate sales, inheritance, and money from divorce proceedings are not eligible for qualification under this specific use. You may be able to use them, but not as an employment-related income; if possible, you’ll have to qualify with these funds under different circumstances.
Checking and savings are generally not eligible as employment-related income, but you may be able to use them if the source of the balance for the account was from an eligible employment-related asset.
Don’t Meet the Guidelines? Options Still Exist
If the mortgage loan you are applying for does not meet the standards that we’ve outlined above, you may still be able to use your employment-related assets as qualifying income. However, they will likely need to be used under the guidelines of standard income, such as interest and dividends or pension income. Talk with a lending professional to see how your assets can be used, as you may still have options, even if they don’t officially qualify as employment-related assets according to Fannie Mae.
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