Flexible retirement income helps buyers qualify

Mortgage broker: Liz Bayer, ProMortgage.

Property type: Ranch home in San Mateo County.

Appraised value: $2.415 million.

Loan amount: $1.05 million.

Loan type: 30-year fixed.

Rate: 6.38%

APR: 6.42%.

Backstory: A couple was referred to me by their financial planner and wanted to buy a new home without yet selling their current home.

We were relying on their retirement assets to qualify their income. They had a monthly draw amount that was lower than we needed, so I suggested that they request a higher draw amount in order to have sufficient qualifying income.

The lending guideline requires that there be sufficient assets available to sustain the monthly draw amount for at least three years, and fortunately, my borrowers had more than enough.

The down payment was also coming from their assets, and the financial planner set up the funds as a “pledged asset,” which my clients intended to pay back with the sales proceeds from their current home once it was sold.

They were worried that the lender would not allow this. I explained that pledged assets are not considered to be a loan and do not compute into the clients' debt obligations whatsoever.

While rates were somewhat better than rates this summer, I did tell my clients that I expected rates would drop further sometime in 2023.

Once they sell their home, they intended to pay down the principal balance on their new home significantly, and I let them know that there are two approaches that they should consider. The first option would be to “recast” their loan utilizing the rate they got on this loan, which is about a 60-day process, or they could refinance their loan altogether if rates do indeed drop.

While everyone loves a lower rate, I recommended to them to let me revisit which option would be better, since a recast does not involve any re-qualifying. The costs are also much lower, since there is no new loan setup involving underwriting or title and escrow nor an appraisal.

To recast a loan, it typically costs in the range of $250 to $500, whereas a refinance (while lowering the payment) does have higher costs since it does involve a new loan.

While a loan officer doesn't handle the recast option, having done a recast myself, I could give them some guidance on how to work with the current lender to accomplish this.

My goal would be to provide them with the analysis as to which option was wiser financially once their departing home sells.

Nice way to go into the holidays, and my clients are thrilled.

“While rates were somewhat better than rates this summer, I did tell my clients that I expected rates would drop further sometime in 2023.”