When working with borrower’s just into retirement years they sometimes come with a unique challenge of FANTASIC credit, TONS of assets, but low-income due to being retired. Nothing more frustrating then telling a perfect borrower like this “sorry I can’t get you a mortgage due to your income” UGGGGG!!!
Little used income tip
Here is a little used but allowable income tip that may get you the loan other’s won’t be able to pull off. It is called Employment Related Assets as Qualifying Income. FNMA outlines this income under B3-3.1-09 (10/24/2016)
The borrower you would want to use this income with the most is that borrower who is not yet retired but is over the age of 59 1/2 and under 70 ½ years old (edit 07/25/2017 any age can use this income as long as borrower has full access to funds regardless of taxes/penalties). You can use the method below instead of the amount of distributions your borrower is currently taking. In other words use option A, which is just document the amount of saved assets the borrower is receiving, or option B as outlined below.
Here is the short version of how employment related assets works.
First: Qualify the borrower
1) Borrower must have unrestricted funds in his/her retirement account (NOT checking or savings)
2) Borrower must be over 59 ½ and under 70 ½ years old (no longer required per FNMA any age can use as long as access unrestricted)
3) Must be individually owned (or all owners must be on loan if shared with spouse)
Second: Allowable types of loan transactions
1) 70% LTV
2) Min Credit Score 620
3) Purchase of a primary or second home (or rate/term refi’s) no cash out refi’s!
4) 1-4 unit home
Third: Determine the monthly income
- Add up all the qualified accounts and reduce gross amount by 30% (40% for borrowers under 59 1/2 to account for penalty)
Example
$500,000 value of retirement account (IRA, 401K, ETC)
($150,000) Reduce by 30% for taxes
$350,000 = Net documented useable assets
- Determine the monthly income
Example
$350,000 / 360 months (or applicable term of loan in months)
$972.22 per month qualified income!!
Sometime the key to be becoming a top producer or top quality underwriter is to know the options to approve a good borrower with all available tools. If you need a handy tool to make sure you get this income right check out www.blueprintio.wpengine.com, this and 30+ income types are programmed into Uber-Writer to make sure you get the income dead on!
5 Responses
I have a client that is 65 years old. Retired and has a IRA for 600,000. He needs to take 6k per month so that he can debt ratio. It is my understanding that we just have to determine that this will continue for 3 years. Am I right in this assumption?
Hi Mike
You might be getting IRA distributions and this income method crossed. If your borrower is already pulling out enough to qualify using distributions from the IRA you are correct 3 years forward on the distributions. BUT if your borrower is not getting distributions or the distributions do not give enough income to qualify you can use this method.
Hope that helps!
Michael
Michael, you have always good info. I am though uncertain if I agree with the added info of July that you show in red. The person at Fannie really said someone who is let’s say 34 years old with a regular or Roth IRA can use asset depletion income? It’s always been for 59.5 or older, so curious why all of the sudden Fannie changed their thought process. By the way, per IRS tax code, if fully disabled borrower, then can be younger than 59.5 to use this income source.
Not sure in the example why you’d need to divide by 360 (30 years) when other sources of income such as child support only have to last for 3 years. I would think the person with $600,000 in a IRA has a lot more going for them that a person with 36 child support payments remaining. Even if you spread it over 10 years that would be $5,000 assuming a 0% rate of return on the IRA account.
Hi Bob
Thanks for the comment, I think what the agencies are going for is a realistic number that a person in retirement would pull from this account. But I agree with you the source of the math I have not heard an explanation on. Just a quick reminder, the 360 is not a fixed number, it changes with the number of months the loan is originated on.