Saturday, 22 November 2014

Jumbo-loan challenges for retirees-Anya Martin


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A lifetime of saving and investing can make retirees feel secure, but showing that assets translate into income remains key when qualifying for a jumbo mortgage.
Debt-free retirement has its allure, but with interest rates so low for jumbo mortgages, some retirees are calculating bigger returns if they leave cash invested and borrow to buy their retirement home, says Brad Blackwell, executive vice president of Wells Fargo Home Mortgage. Jumbo mortgages have higher loan limits than government-backed loans, which top at $417,000 in most places but go up to $625,500 in some high-price areas. Average interest rates were 4.11% for the 30-year, fixed-rate jumbo and 3% for a five-year, adjustable-rate jumbo on the week ending Nov. 14, according to HSH.com.
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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