Financing Options Using Assets as Income
For homebuyers entering their golden years, who may not have a steady income stream from working, both Fannie and Freddie allow access to retirement-related funds and assets for use as income.
Recent changes to Freddie Mac’s (FHLC) guidelines have made this the more optimal of the two programs, but this general overview might be helpful in picking and choosing which might work best for you. Often the asset stream is used to augment another source of income for a borrower who has accumulated sufficient assets, such as a retirement or pension allowance, disability or social security. However, if the assets are sufficient to cover the necessary debt to income requirement of 50%, that is perfectly acceptable.
The typical Borrower is older, maybe liquidating a larger house and downsizing or relocating, and has accumulated life assets through employment over a career, but is now no longer working. Often, these borrowers have not yet begun taking in social security and have not yet set up a regular, periodic draw down of a specific asset to be used as a monthly “annuity”.
Fannie Mae’s guideline:
- The asset that is able to be used is any of a lump sum severance, retirement package, a work-generated 401K or IRA, a Keogh, or a SEP, or a liquid brokerage account consisting of cash, stocks, bonds, and mutual funds. NOTE : lump sum monies held in escrow for things like a lawsuit settlement, insurance claim, lottery winnings, inheritance, divorce proceeds, or sale of real estate, or some form of non-work related account are NOT eligible assets to be used as income.
- To calculate income, FNMA will first deduct any penalty that the borrower would incur to draw out any funds from this account. After that, any funds from this source that are needed to complete the transaction will be deducted. Finally, 70% of that remainder is the amount of the money that can be used, if the money is in the equity or bond market (cash holdings do not have this penalty as it is not subject to market fluctuation). This is obviously very conservative as a calculation but FNMA still opts to do this.
- Once the net of assets has been calculated, you divide that by the number of months in the loan, and the result is your usable monthly income
- The only additional restrictions are that the borrower must have unrestricted use of the funds OR if the assets belong to a spouse or parent, that party must be on the loan. If the borrower is 62 years of age, the max loan to value is 80%, but FNMA does allow for borrowers of any age to do this, max LTV is 70% if the borrower is not 62.
- Loan is eligible for purchase and rate and term refinances, primary and second home only – no investment property
Freddie Mac’s guideline differences:
- At least one borrower on the loan must be 62 years of age
- You may use 100% of the net asset (this is the big one – the study of market fluctuation reveals that historically nobody in our lifetime took a 30% haircut on assets by having them exposed to the securities markets so the 70% was eliminated – hopefully FNMA will follow suit)
- Instead of dividing by the loan term, all net eligible assets are divided by 240 months and that is the calculation needed, even if the loan is for 30 years.
- Max LTV is always 80%
Source: Garrison LaMothe – Managing Partner / Residential Mortgage Loan Originator at Affirm Home Loans, LLC (NMLS #54477)