Buying a Home in Retirement
Mortgage lenders hold the job of qualifying potential borrowers for their mortgage based upon two factors: credit and income. This can often make it difficult for retired borrowers since they have no steady income, and as you’ve probably guessed, this can be a significant problem for aging parents who want San Diego senior housing. Freddie Mac has recently brought forth a rule that will permit retirement assets to be utilized in the qualification for a mortgage loan, with a Freddie Mac spokesman recently said this regarding the new policy:
“Lenders can look at your IRA and 401(k) and lump-sum retirement account distributions as income, but there are some restrictions; in order for the money to be counted, you can’t be using these assets for current income, not even the dividends or interest from the investments.” – Brad German
To take advantage of this option you need to be fully vested and have full access to the funds without risking penalty for early withdrawal. Before the introduction of the rule, lenders were unable to use retirement assets to qualify and individual for a mortgage which caused many complications for baby boomers, fortunately, this is no longer the case and Fannie Mae is currently following a similar rule.
Fannie Mae’s Take on the Rule
Fannie Mae’s take on the rule involves a formula that limits the lender to using 70 percent of the assets, and then makes them subtract the funds needed for the closing costs and the down payment. The remaining funds are divided by 360 months, and this is done regardless of the loan term.
Say for example that you have an individual who holds $1 million in retirement assets. They would be allowed, by Fannie Mae, to include $700,000 of those assets, subtracting $10,000 for closing costs. The individual in question would then be given $1917 per month as their income.
Stretching out Your Income
The effects of the recession are still impacting lives all over the United States, and there are still many who wonder whether their retirement savings are going to last. According to Gabrielle Redford, the Editorial Projects manager in Washington DC, the AARP has noted ten locations in which housing costs are lower than average.
“We worked with a demographer to estimate the budget for a typical retired couple with Social Security and some other assets and determined that if they spent about one-third of their income on housing costs they could buy a $125,000 home with a mortgage payment of about $500 per month, then we looked at property taxes, sales tax and cost of living expenses. We also checked crime rates and the availability and cost of health care.”
With the areas identified, livability was determined, taking into account the amenities surrounding the residences. For example, researchers looked at the arts and culture surrounding each spot, steeped in the knowledge that there was simply no point in moving to a location and paying a lower price if there is nothing to do there. People need interaction and they need things to do – it’s just a fact of life.
Mortgage Loans and Retirees
If the idea of moving into San Diego senior housing is appealing to you, then it is strongly recommended that you first sell your current home so that you can have some liquid cash on hand rather than the solid assets that you may have grown used to over the years. It is also recommended that retirees speak with investment advisors and tax experts along with an experienced lender to decide how much cash to spend and how much of the purchase to finance. It’s true that many people aren’t interested in having a mortgage in retirement, but if you need to stretch your assets, and if you need the tax deduction, it makes sense.
Lenders, for the most part, are going to need a two-year history of asset draws to determine whether the retirees have the discipline needed to adequately manage their money. Freddie Mac’s rules however do not allow you to use assets that you’re currently using as future income for the loan approval. It is strongly recommended, in light of this, that you use two accounts, with one completely untouched before a loan application. This will greatly increase your chances of being approved! It’s a long road, but it can be done, and it doesn’t have to be difficult by any means.
Call me or send me an email, I’ll be happy to help you sell your home when you are ready.
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