How to Use Your Nest Egg to Qualify for a Mortgage

Little-known rules can help people on a fixed income refinance an existing mortgage or buy a new home.

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By Rachel L. Sheedy

Want to refinance your mortgage before interest rates take off? Typically, a borrower needs to show enough work-related income to repay the loan. But as a result of a little-known change in underwriting rules, retirees may be able to use their nest egg to qualify for a new mortgage.

Freddie Mac, the government-sponsored housing finance giant that guarantees mortgages, now allows lenders to consider retirement-account assets to help retirees qualify when applying for a new mortgage or to refinance an existing one. The provision "lets you take advantage of your holdings to a greater degree," says Keith Gumbinger, vice-president of HSH Associates, which publishes mortgage information and rates.

Assets that can be counted under these rules include retirement accounts such as IRAs and 401(k)s, lump-sum retirement account distributions and annuities. "The borrower must be fully vested, and the retirement assets must be in a retirement account that is immediately accessible," says Brad German, a spokesman for Freddie Mac. That means the money cannot be subject to an early withdrawal penalty and cannot currently be used for income.

The formula to use a nest egg works like this: A lender takes 70 percent of "eligible" assets. The lender may then subtract closing costs and other loan expenses.
However, if you pay closing costs from a taxable or non-retirement account, the closing costs will not be subtracted from the eligible assets. Regardless of the loan term, the balance is then split by 360 months, and the monthly installment is added to your monthly income to help you qualify for a mortgage.

Say you have $1 million of eligible assets -- 70 percent of that is $700,000. After subtracting $10,000 in closing costs, you have $690,000. That amount divided by 360 is about $1,917. So $1,917 can be added to your monthly retirement income to help you qualify. Social Security benefits and income from dividends and interest have always been allowed to count under Freddie Mac underwriting standards.

Under these rules, generally known as "asset depletion" or "asset dissipation" rules, you will need a substantial down payment, says Ron Wivagg, national sales manager for Prosperity Mortgage, in Chantilly, Va. You'll need at least a 30 percent down payment if you're buying a new home or at least 30 percent equity if you are refinancing. "This helps us manage the risks involved in making this option available," says German.

Even though the asset rule changes went into effect in spring 2011, Freddie Mac executives noted in May on a company blog that the rules hadn't garnered much attention from lenders or borrowers. These rules are "just starting to get more popular as people are aging," Wivagg says.

Check With Lenders

To make use of these rules, Gumbinger advises asking several different lenders whether they are using the Freddie Mac guidelines. Finding a lender "shouldn't be too hard since any lender selling mortgages to Freddie Mac can make this option available to their customers under our guidelines," says German. He says that about 2,000 lenders nationwide do business with Freddie Mac, including all of the major national and regional lenders.

For those who are interested in refinancing, now may be the time to figure whether it makes sense for your situation. Mortgage interest rates were at 60-year lows, from about 3.5 percent to 4.5 percent, this spring. Although rates have risen, Gumbinger says that if you have an older mortgage with a higher rate, there could still be an opportunity for you to refinance.

The nationwide average interest rate for a 30-year fixed-rate mortgage was recently 4.76 percent, and a one-year adjustable rate mortgage averaged 3.02 percent, according to HSH Associates. For a snapshot of current mortgage rates in your area, check HSH.com and plug in your zip code.


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w_diago

Reverse mortgage loans can meet your retirement needs if you currently own a home. Like the name "Reverse mortgage" implies, instead of making payments to pay-off a mortgage a reverse mortgage makes payments to you.
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December 02 2013 at 2:15 PM Report abuse rate up rate down Reply
Keith

FORGET MORTGAGES. Banks are repossessing homes by the millions, often without legal or just cause, kicking families out and leaving them with nothing they invested in their 'homes'. I have been renting all my life. I am not chained to 30 years of debt. I can pick up and spend 6 months in Asia if I want, and when I come back move in somewhere else. I don't pay taxes on a home either. QUIT BUYING THE BANKING BS.

October 18 2013 at 4:11 PM Report abuse rate up rate down Reply
millersburgcats

Well thank GOD, i can the millioin dollars I have in my retirement account to help me qualify for a loan. Wait, I don't have a million dollars and if I did, would I really need help qualifying for a loan?

October 18 2013 at 1:27 PM Report abuse +2 rate up rate down Reply
John

I guess that's a good idea for the people who are not planning to ever use the money they saved for retirement in retirement.

October 18 2013 at 9:24 AM Report abuse +3 rate up rate down Reply
HonknDodge

I'd really like to know the percentage of people who have money in a 401 plan that have at least $1,000,000.00 in it. I'll bet it's a very small percentage.

October 18 2013 at 8:12 AM Report abuse +3 rate up rate down Reply