Freddie Mac is hoping to spread information about a rule that allows people to leverage financial assets such as retirement accounts as qualifying income when applying for mortgage loans.
Individual Retirement Accounts (IRAs), 401(k)s, distributions from retirement accounts, and funds acquired from the sale of a business can all contribute to a potential borrower’s qualifying income, according to Freddie Mac.
In order to contribute to a borrower’s qualifying income, these financial assets must be accessible—meaning the borrower must not incur a withdrawal penalty when accessing them. They also cannot already be included as a source of income.
“Although it took effect in the spring of 2011, word has apparently been slow to spread judging by the calls we field from inquiring borrowers and housing professionals,” stated Christina Boyle, VP and interim head of single-family sales and relationship management, and John Watkins, VP and single-family chief credit officer, on Freddie Mac’s Executive Perspectives Blog.
The rule is especially helpful for “qualifying retiring Baby Boomers and other savvy homebuyers who have limited incomes, but substantial financial assets,” according to Boyle and Watkins. Total financial assets are not counted 100 percent. First, the eligible assets are multiplied by 70 percent. A lender would then subtract transaction costs such as down payments and closing costs. The amount is then divided by 360 months. This amount is then added to the borrower’s monthly income.
Boyle and Watkins also remind readers on the blog that dividends, interest payments, trust distributions, and Social Security payments can also contribute to qualifying income when applying for a mortgage.
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