If you have ever worked with a borrower who is an excellent saver but is coming up short on DTI ratio you might be able to use this extra trick to get them approved. This extra boost to income is following the Fannie Mae guideline under B3-3-.1-09 called Employment Related Assets as Qualifying Income. In other words, 401k / IRA/ SEP money saved that the borrower has saved. The typical way I see this income used is for people near retirement or that are newly retired that may have had a reduction income but have a fantastic nest egg! But this income is good for any age borrower with retirement savings.
This little-known income source may get you the loan that other’s won’t be able to pull off. In my years of underwriting, I have seen many loans declined over 1-5% debt ratios over the maximum, just a few more bucks coming in would have turned these loans from declines to approval.
FHLMC outlines the program under 5307.1 There are slight differences between FNMA and FHLMC, so please read the guides! Here is the short version of how it works.
First, the borrower must have the following:
1) The borrower must have unrestricted funds in his/her retirement account (NOT checking or savings for FNMA but OK for 62 years or older FHLMC)
2) The borrower cannot currently be drawing from this account for income (FHLMC only)
3) Must be individually owned (or all owners must be on loan if shared with spouse)
Second, the loan must meet the following requirements
1) 80 % LTV
2) Purchase of a primary or second home (or rate/term refi’s) no cash out refi’s
3) 1-4 unit home for FNMA and 1-2 Unit For FHLMC
Let’s see what hypothetical borrower might gain by using this loophole
$500,000 value of retirement account (IRA, 401K, ETC)
($150,000) Reduce by 30% for taxes (assuming the borrower is over 59 1/2 years old and no additional 10% penalty is applied)
$350,000 = Net documented assets
$350,000 / 360 months (note regardless of the term of the loan)
$972.22 per month qualified income!!
I hope this tip saves deals you might otherwise lose because YOU are the educated industry expert! Here’s to successful selling in the mortgage market!