retirement

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.

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% 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% 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% down payment if you're buying a new home or at least 30% 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% to 4.5%, 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%, and a one-year adjustable rate mortgage averaged 3.02%, according to HSH Associates. For a snapshot of current mortgage rates in your area, check HSH.com and plug in your zip code.

Haven’t yet filed for Social Security? Create a personalized strategy to maximize your lifetime income from Social Security. Order Kiplinger’s Social Security Solutions today.

Most Popular

Retirement Income Shouldn’t Depend on the Market; It Should Depend on Math
retirement planning

Retirement Income Shouldn’t Depend on the Market; It Should Depend on Math

The math isn’t as tough as you might think. It all starts with dividing your assets into three different buckets.
May 23, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Why Are Gas Prices Still Going Up?
spending

Why Are Gas Prices Still Going Up?

The cost of a gallon of gas is heading back toward its March highs. What’s driving the resurgence, and will gas prices go down anytime soon?
May 23, 2022

Recommended

2022's Best Mutual Funds in 401(k) Retirement Plans
mutual funds

2022's Best Mutual Funds in 401(k) Retirement Plans

A key to smart retirement saving: spreading your portfolio across a few of the best mutual funds in your 401(k) plan. Here are the 29 top options avai…
May 24, 2022
How to Find the Perfect Balance Between Spending and Saving
retirement

How to Find the Perfect Balance Between Spending and Saving

It's the key to being able to enjoy life now AND in the future. It's also the basis for a successful retirement plan, and it all starts with setting y…
May 24, 2022
Don’t Move to Another State Just to Reduce Your Taxes
retirement

Don’t Move to Another State Just to Reduce Your Taxes

If you’re retired or near retirement, maybe a smarter plan for retirement income will allow you to stay put. Yes, your state income tax rate may be hi…
May 21, 2022
401(k) Contribution Limits for 2022
401(k)s

401(k) Contribution Limits for 2022

Workers saving for retirement have a reason to rejoice over the 401(k) contribution limits for 2022.
May 20, 2022