If you've been turned down for a mortgage refinance because you're retired and on a fixed-income, you've probably felt some frustration as you watched your neighbors refinance into the lowest mortgage rates. Before you give up on refinancing completely, you should know that Fannie Mae and Freddie Mac revised their rules about how to qualify retired homeowners for a new mortgage loan.
Mortgage lenders typically focus on your debt-to-income ratio when determining whether you can qualify for a new loan, along with your credit score. Retirees have found that their income, typically from Social Security and sometimes a pension benefit, is not always high enough to qualify for a loan even if they have significant assets in retirement funds.
Most lenders will qualify borrowers for a housing payment equal to 28 to 32 percent of the borrowers' income. Your overall debt-to-income ratio should be no more than 41 to 43 percent of your gross monthly income for most lenders; so if you're still paying for a home equity loan, a car loan, credit card debt or other debt in retirement, it can be tough to meet that hurdle without including the income earned on your retirement investments. Even borrowers with significant home equity, who typically can qualify more easily for a refinance than borrowers with little equity, struggle to overcome the income issued during retirement.
Refinancing rules for retirees
According to syndicated columnist and mortgage expert Ken Harney, retirees who have yet to begin taking money from their retirement accounts can now use those assets to qualify for a refinance. The revised rules allow mortgage lenders to calculate your income based on your retirement assets using a formula of multiplying your assets by 70 percent to conservatively allow for market volatility. For example, if you have a retirement account with $800,000, the mortgage lender would multiply that by 70 percent to reach $560,000 and then divide that sum by 360 to arrive at 30 years of monthly withdrawals. In this case, that would be an extra $1,556 in income. If you apply for a 10- or 15-year loan, your reduced retirement fund would be divided by 120 or 180 for monthly withdrawals equivalent to your loan pay-off date. If you've already begun making withdrawals on your funds, the rules are a little more complicated, but you can still use your retirement assets for income.
According to a recent article in AARP, you aren't required to actually make those withdrawals, it's just an extra way of insuring you have the income to support a new mortgage refinance.
The AARP article reports, however, that not all lenders are familiar with the new rules for including your retirement funds as income. It may take some extra searching to find a mortgage lender willing to help you through the maze of refinance requirements, but locking down a low interest mortgage loan for your retirement could be well worth the time.