A retiree, like any other borrower, generally must meet a 43% debt-to-income ratio (DTI), mandated by federal mortgage rules. This number reflects the borrower’s percentage of monthly debt payments relative to monthly income.
Retirees who plan ahead can qualify, and lenders have methods to translate investments into eligible income even if a borrower can’t produce a W-2, Mr. Blackwell says.
Today’s
typical retiree will receive income from Social Security; distributions
from IRAs, 401(k)s, annuities and other retirement accounts; and
possibly a pension. Business owners may no longer get a salary but still
receive profit shares and/or have significant wealth tied up in an
enterprise, and many high-end retirees may draw revenue from commercial
real-estate ownership, residential rental properties or other sources,
says Tom Wind, executive vice president of home lending at EverBank.
High-net-worth
individuals often will argue that they clearly have enough money in
assets to pay off a loan at any time, says Bill Banfield, vice president
at Quicken Loans. “They may be thinking that they have a big IRA and
they could use that to take a distribution to make the loan payments,”
he adds. “That’s all good and fine, but we’d like to see that all set up
before they apply for the loan.”
The
key to qualifying is to demonstrate that a retiree’s assets translate
into income via tax returns, bank statements and other documents, he
adds. “The lender is going to want to make sure you have receipts for
distributions and a schedule for receiving them,” he adds.Retirees also need to show proof that the payments will continue in the same amounts for at least three years into the future, Mr. Banfield says. If a borrower is an early retiree under 59½ years old, the threshold for taking withdrawals from IRAs without tax penalties, the lender will adjust income estimates accordingly, he adds.
For
retirees who don’t want to increase their distributions, another
possible option is a nonqualified jumbo mortgage, which offers
flexibility on the federal DTI rule, Mr. Wind says. Lenders have to
waive liability protection to issue nonqualified mortgages, but some
lenders will take that risk with retirees who have substantial invested
assets they don't want to liquidate, he adds.
To
calculate an income estimate in such cases, EverBank will assign a
conservative earnings rate to the total dollar amount of the assets and
amortize the amount to the loan’s term length, Mr. Wind says. Wells
Fargo uses a similar method to calculate DTI for nonqualified mortgages
for borrowers with multimillions of dollars in assets, Mr. Blackwell
says.
The first step for any
retiree or person approaching retirement is a financial adviser, Mr.
Blackwell says. An adviser can look at a retiree’s overall financial
picture and advise whether to pay cash or borrow when buying as home.
The adviser can also calculate retirement-account distributions that
will help the borrower qualify for a loan, he adds.
Here are some more considerations that retirees may want to weigh when deciding whether to apply for a jumbo mortgage:
• Credit scores.
Retirees with a sufficient income stream but lower credit scores still
may not qualify for a mortgage or will receive a higher interest rate
from a lender.
• Trusts.
Retirees who want to buy a home and hold it in a revocable trust as
part of their estate plan still have to demonstrate their ability to
repay the loan, Mr. Blackwell says. Still, assets in the trust are
considered in the ability-to-repay debt calculation, he adds.
• Capital-gains taxes.
When deciding whether to cash out investments to buy real estate,
remember to calculate not just lost returns but also the potential
capital-gains-tax hit, Mr. Banfield says.
Culled from wall street journal in yahoo finance
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