A little-known change in Freddie Mac’s rules could be a big help to qualifying retiring Baby Boomers and other savvy homebuyers who have limited incomes, but substantial financial assets, for a low-rate conforming, conventional mortgage.
The change lets lenders use a significant portion of a borrower’s eligible financial assets to determine whether they qualify for a Freddie Mac mortgage. Although it took effect in the spring of 2011, word has apparently been slow to spread judging by the calls we field from inquiring borrowers and housing professionals.
Under our guidelines, Individual Retirement Accounts and 401(k)s, lump-sum retirement account distributions, or the proceeds from the sale of a borrower’s business can be used to determine a borrower’s eligibility for a Freddie Mac mortgage. In addition, assets in an IRA and 401(k) must be in a fully-vested retirement account recognized by the Internal Revenue Service. The financial assets also must be entirely accessible to the borrower, not subject to a withdrawal penalty, and not be currently used as a source of income.
To determine borrower eligibility, the lender first adds up the eligible assets, multiplies the total by 70 percent, and then subtracts the funds needed to complete the transaction (i.e., down payments, closing costs, financing costs, escrows, and pre-paid). The remaining amount is then divided by 360 months (regardless of loan term or account balance). The underwriter can then use what’s left to help the borrower meet the mortgage’s income eligibility requirements.
It’s also important to remember that Freddie Mac has long allowed lenders to use income from dividends, interest payments, trust distributions, and Social Security payments in calculating a borrower’s qualifying income.
All of which means Freddie Mac’s current requirements offer a potentially big deal for many prospective homebuyers, including the nation’s rapidly growing population of retirees and near-retirees who aspire to buy or refinance a home.
Can this asset option help you or someone you know qualify for a Freddie Mac mortgage at today’s historically low rates? The best way to find out is to get all of the details by talking to a mortgage lender who does business with Freddie Mac. It shouldn’t be too hard to find one. There are more than 2,000 of them across the United States and they include the nation’s largest banks and mortgage bankers.