Summary: This article explains a little-known rule change regarding mortgage eligibility in the U.S. This change was recently highlighted by Christina Boyle, a vice president at Freddie Mac. In short, borrowers can use 401(k) and IRA assets to help them qualify for a home loan.
Everyone knows you need to have sufficient income to qualify for a mortgage. In fact, the federal government’s new Ability-to-Repay rule puts even more emphasis on income verification and documentation.
But what about those borrowers with limited income but significant assets? Specifically, what about retirees and the soon-to-be retired?
Freddie Mac recently promoted a rule change that could benefit borrowers with substantial assets, such as retirement funds and accumulated savings. This change actually took place back in 2011. But, according to Freddie Mac executive Christina Boyle, “word has apparently been slow to spread judging by the calls we field…”
So let’s get the word out. Borrowers with limited income but significant assets in the form of IRAs and 401(k)s may be eligible for a mortgage loan.
How Freddie Mac Influences the Lending Industry
Freddie Mac is one of two government-sponsored enterprises (GSEs) that serve as gatekeepers to the secondary mortgage market. The secondary market is where home loans are bought, sold and resold in the form of bundled securities (MBS). Fannie Mae is the other GSE.
Together, these two organizations set the standards for conventional mortgage eligibility in the United States. Home loans that conform to their standards are said to be “conforming loans.” In short, the rules issued by Freddie Mac and Fannie Mae eventually become industry-wide standards.
According to Freddie Mac’s current guidelines, mortgage lenders can use the following items when determining borrower eligibility:
- Individual retirement accounts (IRAs) *
- 401(k) retirement savings plans *
- Proceeds from the sale of a business
* In order to be used for mortgage eligibility, IRA and 401(k) funds must be in a “fully vested retirement account recognized by” the IRS.
Why are we showcasing this rule? Because there are many well-qualified borrowers who wrongfully assume they are not eligible for a mortgage, simply because they have limited or reduced income. These would-be borrowers will benefit from a bit of extra research.
Mortgage Math: How Lenders Determine Eligibility
Will your assets make you eligible for a mortgage loan, under Freddie Mac’s guidelines? To find out, you can do the same math lenders use when determining eligibility. Here’s what Freddie Mac requires lenders to do:
- Add up all of the borrower’s eligible assets.
- Multiply the total asset number by 70% (0.7).
- Subtract the amount of money needed to close the loan (closing costs, prepaid interest, down payment, etc.).
- Divide the remaining amount by 360 months.
If the lender’s underwriter decides that the amount left over meets basic income-eligibility requirements, the borrower may be eligible for a mortgage loan.
Granted, these are not the only requirements for getting a loan. Credit scores and debt ratios are equally important. This rule change has to do with income and asset verification, in particular.
Lenders are also permitted to use alternative income sources when qualifying borrowers. These include income from dividends, Social Security payments, trust distributions, and interest payments from various types of financial investments.
Are you eligible for a mortgage, according to Freddie Mac’s rules and guidelines? The best way to find out is to apply for a loan through a lender that does business with Freddie Mac. As Christina Boyle points out, it shouldn’t be hard to find such a lender:
“There are more than 2,000 of them across the United States and they include the nation’s largest banks and mortgage bankers.”