One of the biggest challenges for retired borrowers is their ability to meet lenders’ income requirements. With 'stated-income' and 'no doc' loans disappearing following the housing meltdown, and federally mandated mortgage reforms keeping lending standards high, retirees had to prove they had adequate income to qualify for loans.
In 2011, Freddie Mac released guidance to lenders allowing them to use retirees’ IRAs and 401Ks as acceptable income sources, even if borrowers are not currently withdrawing funds from the accounts. Previously, borrowers drawing on their retirement accounts could use those funds as acceptable sources of income, but proof of withdrawal history was required. A new retiree could not use a retirement account for qualifying purposes until he established a record of withdrawing funds from it.
Freddie Mac today reminded lenders and borrowers of this underutilized program via their Executive Perspectives Blog, specifically mentioning that “word has been slow to spread judging from calls we field from inquiring borrowers and housing professionals.” The change is a “potentially big deal” for retirees who want to buy or refinance a home.
The funds must be in a fully vested, qualified retirement account (or from the sale of a business), and are counted at 70% of face value, then amortized over 30 years. For instance, a borrower with $300,000 in his IRA would get credit for $210,000 divided by 360 months, or $583/month in income.
Figuring the income over a 30 year period results in a relatively more conservative income calculation--one that will most benefit those with substantial portfolios. Despite those limitations, being able to obtain a loan without withdrawing retirement funds provides a welcome alternative for a growing borrower demographic.