Fan­nie and Fred­die pro­grams of­fer op­tions to re­tirees seek­ing home loans

Miami Herald (Sunday) - - Home - BY KEN­NETH R. HARNEY Har­n­ey­col­umn@gmail.com

WASH­ING­TON

It’s a com­mon prob­lem for re­tirees seek­ing to re­fi­nance or get a new mort­gage: Af­ter their reg­u­lar em­ploy­ment earn­ings stop flow­ing, their monthly in­comes drop. They might have hun­dreds of thou­sands of dol­lars stored away in IRAs or 401(k) plans and other in­vest­ments, but for mort­gage pur­poses, they don’t have enough monthly in­come to qual­ify for the loan they want. They look as­set rich, in­come poor.

In some cases, that im­pres­sion can cre­ate se­ri­ous prob­lems — even re­jec­tions of ap­pli­ca­tions by loan of­fi­cers who don’t know how to work with pre-re­tiree and re­tired ap­pli­cants.

Take the case of Jim Planey. He’s a re­tired in­dus­trial real es­tate bro­ker, lives in a home val­ued around $1 mil­lion in Glen­view, Illinois, near Chicago, and has ac­cu­mu­lated sub­stan­tial re­tire­ment funds af­ter a 40-year ca­reer. He and his wife have stel­lar credit scores in the 800s and de­cided to re­fi­nance their ex­ist­ing mort­gage, an ad­justable-rate loan that was about to shift to a higher in­ter­est rate.

Planey as­sumed that his ap­pli­ca­tion would be a slam dunk. Not only did he have sig­nif­i­cant home eq­uity as well as a flaw­less his­tory of on-time pay­ments to his bank, he even planned to re­duce the prin­ci­pal bal­ance on his mort­gage from around $600,000 to $400,000.

What he ran into shocked him. The bank’s loan per­son­nel “didn’t know any­thing” about han­dling mort­gage ap­pli­ca­tions from re­tirees, he told me last week, and they ques­tioned whether his post-re­tire­ment in­come would sup­port a new mort­gage at to­day’s in­ter­est rates. His ap­pli­ca­tion con­tained de­tailed doc­u­men­ta­tion on his sub­stan­tial fi­nan­cial as­sets, but the loan of­fi­cers at his bank were clue­less about what to do with them.

Most im­por­tantly, they were in the dark about pro­gram op­tions of­fered by in­vestors Fred­die Mac and Fan­nie Mae and some pri­vate lenders for re­tirees and pre-re­tirees. The op­tions es­sen­tially rechar­ac­ter­ize re­tire­ment as­sets into qual­i­fied in­come for mort­gage pur­poses, some­times with­out re­quir­ing ac­tual with­drawals of funds. Had the bank per­son­nel been bet­ter trained and had more ex­pe­ri­ence, Planey could have been ap­proved in a mat­ter of days rather than the eight weeks it ul­ti­mately took him to get a run-of-the-mill refi.

The pro­grams gen­er­ally take two forms: One treats on­go­ing dis­tri­bu­tions from IRAs, 401(k) ac­counts and sim­i­lar funds as in­come that’s ac­cept­able for home­m­o­rt­gage ap­pli­ca­tions, pro­vided the with­drawals plus other in­come are ad­e­quate to amor­tize the loan and are likely to con­tinue for at least the next three years. The sec­ond op­tion is de­signed for peo­ple who have re­tire­ment funds that haven’t been tapped yet. Loan of­fi­cers can use re­tire­ment-ac­count bal­ances as the ba­sis for what func­tions es­sen­tially as im­puted in­come — money that is or will be avail­able to the bor­rower to sup­ple­ment reg­u­lar monthly in­come when needed to make re­pay­ments on the loan.

Steve Stamets, a se­nior loan of­fi­cer at The Mort­gage Link, LLC, in Rockville, Mary­land, has used th­ese op­tions pe­ri­od­i­cally, and con­sid­ers them “a great al­ter­na­tive” when clients have as­sets but don’t quite fit the tra­di­tional rules that de­fine el­i­gi­ble in­come. He of­fered a simplified ex­am­ple of how it works: A client had $2 mil­lion in mu­tual funds but not enough reg­u­lar in­come to qual­ify for the size mort­gage he sought. The client didn’t want to with­draw money or be forced to liq­ui­date se­cu­ri­ties. Us­ing Fan­nie Mae’s pro­gram op­tion, he was able to pro­duce qual­i­fy­ing in­come for mort­gage pur­pos- es of $3,889 per month us­ing a for­mula that dis­counts the fund bal­ances by 30 per­cent to pro­tect against mar­ket fluc­tu­a­tions that might de­value them. This amount was then added to other in­come the client had to to­tal the amount he needed to sup­port the mort­gage ap­pli­ca­tion.

John Meuss­ner, a loan of­fi­cer for Ma­son-McDuffie Mort­gage Corp. in San Ra­mon, Cal­i­for­nia, says that al­though Fan­nie’s and Fred­die’s op­tions can be help­ful, they come with their own com­pli­ca­tions as well. One of the biggest: The as­sets in some se­niors’ in­vest­ment or re­tire­ment ac­counts may not qual­ify if they’re de­rived from in­el­i­gi­ble non-em­ploy­ment-re­lated earn­ings. An­other is­sue: Loan terms for se­niors may be just 10 or 15 years. Monthly pay­ments on such mort­gages are higher than those with stan­dard 30year terms. Not all clients can af­ford them.

Bot­tom line: If your as­sets are tied up in re­tire­ment and in­vest­ment funds, and you’re seek­ing a mort­gage based on your post-re­tire­ment in­come, ask loan of­fi­cers about the Fan­nie and Fred­die op­tions as well as al­ter­na­tives of­fered by some pri­vate lenders. If the loan of­fi­cer pleads ig­no­rance, you’ll know it’s am­a­teur hour. Shop else­where.

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