If you are asset rich, but income poor, you might think it is impossible to secure a mortgage. Lenders want to verify your income in order for you to fall under the Qualified Mortgage Guidelines and since the days of stated income loans seem to be long gone, many people think they are out of luck. The good news is that there are several ways to secure a mortgage using your retirement accounts rather than your income. Understanding how to use your liquid accounts to help you qualify for a loan can help you see how you can secure financing.
Using your Assets as Income
Let’s say you have a significant amount of assets available that make it easy for you to afford a loan, but your income is not steady. This could be because you work for yourself or because you retired, for example. Lenders can use your asset accounts to qualify you for the program. The qualifying income they use, however, might be different from what you anticipate. They cannot take the face value of your checking, savings, IRA, 401K or stock accounts, though. They use the following calculation:
The lender starts by subtracting any money needed for a down payment or closing costs from the total amount you have. From there, they will take 70% of the remaining money. For example, if you have $1,300,000 in your accounts. The lender will subtract any money needed for a down payment or closing costs and then take 70% of the amount left. If your down payment and closing costs equal $10,000, the lender would use 70% of the remaining $1,290,000, which equals $903,000. They the divide this number by 360. This leaves you with $2,508 per month in qualifying income.
These numbers obviously do not qualify you for a very large loan, but in most areas, it could provide you with modest housing without verifying your actual income which can be helpful in retirement.
Exceptions to the Rule
There is one exception to the rule when a lender determines your income. This exception occurs if you already hit retirement age. Let’s say for example, you are 75 years old and wish to apply for an asset based mortgage. You will use your retirement income in order to qualify. You are fully vested and have $1,000,000. The lender will go through the same process of subtracting closing costs and the down payment from the $1,000,000 and take 70% of that amount to come up with your gross income. However, where the changes occur is in the number of months used to divide the total. The lender uses the average lifespan of 85-years old to figure your income. If you are already 75-years old, there are only 10 years left in the average lifespan, so the lender divides the remaining total by 120 rather than 360. If you are any younger than 55-years old, though, a majority of lenders will use the 360-month rule to figure your income.
Who Provides Asset Based Loans?
There are probably more banks than you realize that offer asset-based loans. Your best bet if your situation is complicated is to talk to a portfolio lender that keeps the loans on its own books. This lender can essentially make its own rules and even bend them whenever necessary. If your accounts are straightforward, such as a fully vested 401(K) for example, you could look into a Fannie Mae backed loan. If you choose this route, be prepared to follow the following guidelines:
- Every person on the account must also be on the mortgage
- The money must be easily accessible (a liquid account)
- There cannot be a penalty for removing the money from the account
- The accounts must be recognized by the IRS
Freddie Mac has similar guidelines as well:
- The same people must be on the account as well as the mortgage
- The money must be able to be withdrawn immediately
- There cannot be any type of penalty for removing the money from the account
- Money from the sale of a business is allowed
- The IRS must approve the accounts
The most common type of accounts that Fannie Mae and Freddie Mac allow include:
- Severance packages from an employer
- Lump sum retirement from an employer
- Basic retirement accounts
- Mutual funds
Portfolio lenders often have a little more leeway in the types of accounts they can use. They include:
- Money from self-employment
- Common liquid accounts, such as savings, CDs and Money Market accounts
- Mutual Funds
- Trust Funds
- Winnings from the lottery
- Money rewarded from a lawsuit
Qualifying for the Loan
Once you know how your income fares, you can determine what type of loan you qualify to receive. Since your income has such a bearing on the entire process, you should figure this component out first. Then you can get prequalified for a specific loan amount and start the home buying process.
The remainder of the qualifications for an asset based loan remains the same as any other loan type. You must meet the credit score, debt ratio and LTV requirements in order to qualify. These requirements vary by lender and the program you opt to use.
The only difference in the asset depletion loan is that you do not use employment income to qualify for the loan. This means you do not have to verify your place of employment, provide paystubs or W-2s. As long as your liquid accounts provide you with enough income to meet the debt ratio requirements, you are in luck.
When you look for asset-based loans, make sure you shop around. This is primarily a portfolio based loan, which means lenders have their own programs. Unless you meet the strict requirements of the debt ratio, credit scores and LTV of Fannie Mae or Freddie Mac, you will need to shop with portfolio lenders. This means quite a bit of shopping and figuring out who has the best program. Do not jump at the first mortgage program you see just because you can receive an approval. Instead, find the one that offers the lowest closing costs, interest rate and APR. Remember to look at the big picture – do not look strictly at the interest rate, but at how much the loan costs over the entire term. This way you can make the choice that will benefit your assets the most, rather than depleting them and forcing you to go back to work when you are supposed to enjoy your golden years in retirement.
The asset based mortgage has reached high interest in recent years because of the large number of baby boomers entering retirement. If you have significant assets that are in an easily verified account that the IRS recognizes, you can take advantage of this program without much worry. This way you can purchase a modest house that you can afford and that will enable you to enjoy your retirement without financial stress.