Today’s blog goes over one of the updates announced in SEL 2018-08 by Fannie Mae. I want to focus on the improvements for a borrower using “employment-related assets as income”.
Before we get to that update, I have to mention the most asked question I get on this income type is:
What are employment related assets?
The short definition is any money you saved in a retirement vehicle while working. I know sometimes people think that employment-related means only if you had a job, but that is not true. All income type that supply your 401K, SEP, Roth IRA, will qualify. Your career could have been spent as a self-employed person, a real estate investor, employee, or heck invested your rich aunt’s inheritance into your 401K. It all qualifies!
Now onto the changes with this announcement. Fannie increased the HCLTV from 70 up to 80 if the borrower is 62 years old at the time of closing, no other changes were announced, but that one is a great change on its own!
As of 2016 both Fannie and Freddie offer this program. Even though Freddie is the newbie for this income type (only started in 2016) they have offered the better product when you compared them side by side.
As a refresher, this income type really requires the reader to pull up the guidelines and carefully go through multiple bullet points to make sure the borrower meets all the requirements…and there is a bunch of bullet points!
A quick summary of the differences:
Fannie Mae:
- Allows an 80% CTLTV as long as the borrower is 62 years old, 70% if younger than 62
- Only allowed for a principal residence and second homes. The good news here, the primary can be one to four units.
- The borrower still qualifies even if the assets require penalties and tax reductions for early withdrawal.
- Assets in retirement accounts must be reduced by 30% when determining final numbers
Freddie Mac:
Freddie is a little more aggressive on this program overall. If you have to choose between them you will get more income on the same amount of savings using the Freddie program.
- 80% CLTV but you must be 62 years old to qualify for this program.
- One and two unit primaries and second homes
- Freddie does not require the reduction of retirement assets by 30%
- The income must be divided 360 month calculation regardless of the loan term.
I wrote about this little known deal saver last year. I still believe every mortgage company should keep this income type in the tool bag if your have senior citizens borrowers who have a great savings nest egg to work with.
This wraps up this week’s blog. Hope that helps you get one more deal out there. We’ll talk to you next week.
7 Responses
Love your blog Michael!
Can the borrower with the employment related assets be a non-occupant cosigner? The primary borrower will occupy. It’s a single family residence.
Hi Sandra
I reviewed the guidelines and it states that the borrower must be 100% owner of the assets OR co-owner with the co-borrower on the loan. So that scenerio will not work as you stated it.
Thanks!
Michael- Maybe you can help us settle a debate we have going on.
The guidelines indicate the following:
A non-self-employed severance package or non-self-employed lump sum retirement package (a lump sum distribution) — these funds must be documented with a distribution letter from the employer (Form 1099–R) and deposited to a verified asset account.
So it looks like Self Employment related assets are not allowed. But your post gives the impression that self-employed assets would be allowed? Can you comment?
Also, if a borrower has an IRA, do they funded with employment related assets 10 years ago, do we need to do anything to document that they were originally employment related assets? Or is it simply the fact that those assets are in an IRA that they are eligible to be used for income from employment related assets.
(Usual disclaimers,…. borrower meets all other guidelines, we are not trying to use these income AND assets, we are only using for income, etc. etc. etc. )
Hi Pat
So sorry I missed the question when you posted it!
I think the confusion with the name of this income is “employment-related assets”, by the title it does appear that only “job” income can be used, which is not the case. The term actually means assets saved due to working… that “working” can be employed or self-employed (both are “employment”) The reason I state that SE money saved acceptable is in bullet point two on acceptable sources of the assets it states the following :
” For a 401(k) or IRA, SEP, Keogh retirement accounts – the borrower must have unrestricted access to the funds in the accounts and can only use the accounts….”.
As you can see two of the types of accounts are plans that SE borrowers use to save for retirement in the same way an employed person uses a 401K. SEP stands for Simplified Employee Pension which is a retirement plan for self-employed business owners. The Keogh plan is an employer-funded, tax-deferred retirement plan designed for unincorporated businesses or self-employed persons.
The “lump sum” part says this … you can not “buy out” yourself as a business owner… that would mean the same person is the “payeee” and the “payor” which means there easily could be fraud in that transaction. So to stop that possibility if you have just received a “buy out” from your employer to quit working….your employer cannot be yourself!
On the next question about the IRA, you do not need to source the income for any case…. any money in that account is qualified to be used in this income type.
Hope this helps!
Michael,
For employment related assets can an assets in an account other than a sep, ira, 401k, or Keogh be considered for income if a distribution is set up. For example if a borrower had several million dollars in a fidelity investment account and borrower was 55 yrs old. The money over the years would have been sourced from inheritance and job related income etc….Investment account made up of cash, mutual funds, stocks etc…
Would a traditional IRA qualify for Employment Related Assets since it’s a savings account from a prior 401K and cash in to a traditional IRA?
Hi Erica
Yes it would, the guideines state that accounts that qualify are retirement here is a copy of the wording from FNMA B3-3.1-09
Assets must be liquid and available to the borrower and must be sourced as one of the following:
A non-self-employed severance package or non-self-employed lump sum retirement package (a lump sum distribution) — these funds must be documented with a distribution letter from the employer (Form 1099–R) and deposited to a verified asset account.
OR
For 401(k) or IRA, SEP, Keogh retirement accounts – the borrower must have unrestricted access to the funds in the accounts and can only use the accounts if distribution is not already set up or the distribution amount is not enough to qualify. The account and its asset composition must be documented with the most recent monthly, quarterly, or annual statement.