How to Use Your Nest Egg to Qualify for a Mortgage

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By Rachel L. Sheedy

Want to refinance your mortgage before interest rates take off? Typically, a borrower needs to show enough work-related income to repay the loan. But as a result of a little-known change in underwriting rules, retirees may be able to use their nest egg to qualify for a new mortgage.

Freddie Mac, the government-sponsored housing finance giant that guarantees mortgages, now allows lenders to consider retirement-account assets to help retirees qualify when applying for a new mortgage or to refinance an existing one. The provision "lets you take advantage of your holdings to a greater degree," says Keith Gumbinger, vice-president of HSH Associates, which publishes mortgage information and rates.

Assets that can be counted under these rules include retirement accounts such as IRAs and 401(k)s, lump-sum retirement account distributions and annuities. "The borrower must be fully vested, and the retirement assets must be in a retirement account that is immediately accessible," says Brad German, a spokesman for Freddie Mac. That means the money cannot be subject to an early withdrawal penalty and cannot currently be used for income.

The formula to use a nest egg works like this: A lender takes 70 percent of "eligible" assets. The lender may then subtract closing costs and other loan expenses. %VIRTUAL-article-sponsoredlinks%However, if you pay closing costs from a taxable or non-retirement account, the closing costs will not be subtracted from the eligible assets. Regardless of the loan term, the balance is then split by 360 months, and the monthly installment is added to your monthly income to help you qualify for a mortgage.

Say you have $1 million of eligible assets -- 70 percent of that is $700,000. After subtracting $10,000 in closing costs, you have $690,000. That amount divided by 360 is about $1,917. So $1,917 can be added to your monthly retirement income to help you qualify. Social Security benefits and income from dividends and interest have always been allowed to count under Freddie Mac underwriting standards.

Under these rules, generally known as "asset depletion" or "asset dissipation" rules, you will need a substantial down payment, says Ron Wivagg, national sales manager for Prosperity Mortgage, in Chantilly, Va. You'll need at least a 30 percent down payment if you're buying a new home or at least 30 percent equity if you are refinancing. "This helps us manage the risks involved in making this option available," says German.

Even though the asset rule changes went into effect in spring 2011, Freddie Mac executives noted in May on a company blog that the rules hadn't garnered much attention from lenders or borrowers. These rules are "just starting to get more popular as people are aging," Wivagg says.

Check With Lenders

To make use of these rules, Gumbinger advises asking several different lenders whether they are using the Freddie Mac guidelines. Finding a lender "shouldn't be too hard since any lender selling mortgages to Freddie Mac can make this option available to their customers under our guidelines," says German. He says that about 2,000 lenders nationwide do business with Freddie Mac, including all of the major national and regional lenders.

For those who are interested in refinancing, now may be the time to figure whether it makes sense for your situation. Mortgage interest rates were at 60-year lows, from about 3.5 percent to 4.5 percent, this spring. Although rates have risen, Gumbinger says that if you have an older mortgage with a higher rate, there could still be an opportunity for you to refinance.

The nationwide average interest rate for a 30-year fixed-rate mortgage was recently 4.76 percent, and a one-year adjustable rate mortgage averaged 3.02 percent, according to HSH Associates. For a snapshot of current mortgage rates in your area, check and plug in your zip code.

More from Kiplinger:

Best States for Retirement Aren't the Ones You Might Think
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How to Use Your Nest Egg to Qualify for a Mortgage
Not only does it have a Florida-like climate, but Tennessee also boasts the second lowest cost of living in the country. Combined with a low tax burden and great access to medical care, Tennessee is ideal for retirees living on fixed incomes, Kahn said. The only downside: the state has one of the country's highest crime rates.

One of the state's oldest towns, Sevierville, Tenn. (pictured above), provides close access to a national park where retirees can picnic, hike and fish, and it's an easy drive to Knoxville.
Another balmy locale, the state has an average temperature of 66.7 degrees -- behind only Hawaii and Florida for warmest average climate. Louisiana residents also enjoy low taxes, above-average access to medical care and a relatively cheap cost of living. Like Tennessee, though, it suffers from a crime rate that is among the nation's highest.

It may not be a retirement hot spot, but Bankrate says it should be. The state has the country's lowest crime rate, and an estimated state and local tax burden of just 7.6% -- lower than every state but Alaska. The downside: with an average temperature of 46 degrees over the past 30 years, it's pretty darn cold there.

For small town lovers, Aberdeen, S.D., holds a renowned film festival and has a historic downtown that plays host to farmers markets, haunted walking tours and holiday parades.

Photo: Conspiracy of Happiness,

The Bluegrass State is one of many Appalachian states to dominate Bankrate's top 10. While it may not have Florida's sunny beaches, it does boast an extremely low cost of living, warmer-than-average temperatures and a below-average crime rate.

In Louisville, retirees can stay active by walking or biking on the Louisville Loop, a pedestrian path set to eventually cover more than 100 miles. The smaller town of Danville, Ky., meanwhile, is ideal for horse lovers.

Beyond its warm weather, Mississippi also provides cheap living costs and a lower tax burden. But retirees may want to choose where they live carefully: the state has a high crime rate and subpar access to medical care. It has only 178 doctors per every 100,000 residents -- almost 100 less than the national average.

Photo: Natalie Maynor,

This coastal state came in above average for most factors that Bankrate analyzed, including climate, access to healthcare and cost of living. Its crime rate is one of the lowest in the country, with only 2,446 property and violent crimes per 100,000 people.

An affordable college town, Lynchburg, Va. offers the beauty of the foothills of the Blue Ridge Mountains, as well as historic Civil War sites.

Another Appalachian state, West Virginia is boosted onto the list by low crime, a cheaper cost of living and above-average access to medical care. Still, it has a colder climate than some of the other states.
Warm temperatures, low state and local taxes and a relatively low cost of living all pushed Alabama into the top 10. Yet it suffers from below-average access to medical care and a relatively high crime rate, with 4,026 crimes per 100,000 people -- almost double that of Virginia.

Home to a campus of the University of Alabama, Huntsville, Ala. offers botanical gardens and nature preserves and 19th century architecture. Near the Georgia border, Fort Payne, Ala. is a quintessential small town with activities that include an annual fiddling convention and a stop at the "world's largest yard sale."

Beyond its cornfields, Nebraska offers excellent access to hospital care, a below-average crime rate and living costs among the country's cheapest. But with a lower than average temperature, it's another state for retirees who don't mind the cold.
Like neighboring South Dakota, this state is not for retirees looking for warm weather. But it does have the second lowest crime rate in the nation, a mild estimated tax burden of 8.9% and 5 hospital beds available for every 1,000 residents.
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