Mortgage Lending Eases for Retirees Under Freddie Mac

A “little known change” in Freddie Mac’s rules could help limited income homeowners qualify easier for a new mortgage, including retirees. 

Though the rule has been around since Spring 2011, it has been “slow to spread,” according to Freddie Mac executives

The change lets lenders use a significant portion of a borrower’s eligible financial assets to determine whether they qualify for a Freddie Mac mortgage.

Under Freddie Mac’s guidelines, borrowers can utilize Individual Retirement Accounts (IRA) and 401(k)s, lump-sum retirement account distributions, even the proceeds from the sale of a borrower’s business, to determine their eligibility for a low-rate, conventional mortgage.

Additionally, assets in an IRA and 401(k) must be in a “fully-vested” retirement account recognized by the Internal Revenue Service, and must be entirely accessible to the borrower, not subject to a withdrawal penalty, and also not be currently used as a source of income.

To determine borrowers’ eligibility, a lender first adds up the eligible assets and multiplies the total by 70%. Then, the lender subtracts the funds needed to complete the transaction, such as down payments, closing costs, financing costs, escrows, etc. 

The remaining amount is then divided by 360 months, regardless of loan term or account balance. The underwriter can then use what’s left to help the borrower meet the mortgage’s income eligibility requirements. 

Freddie Mac has long allowed lenders to use income from dividends, interest payments, trust distributions, and Social Security payments in calculating a borrower’s qualifying income, according to Christina Boyle, vice president and interim head of Single-Family Sales & Relationship Management with Freddie Mac. 

“All of which means Freddie Mac’s current requirements offer a potentially big deal for many prospective homebuyers, including the nation’s rapidly growing population of retirees and near-retirees who aspire to buy or refinance a home,” writes Boyle. 

Written by Jason Oliva

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