Many people ask about 15 year mortgages. Some people ask about a 15 year mortgage in relation to refinancing. They figure with lower rates maybe they can afford a 15 year loan instead of a 30 year loan. And some people inquire about a 15 year loan when buying a home, because they want to pay off debt faster. But the monthly payments are quite a bit higher on a 15 year loan. Although you can save a lot of money over the long haul, you really have to decide what you can afford, and if cash flow is more important than building equity.
Blog Category: mortgage qualifying
When things drop there is usually trouble, like bombs, glassware, or variable income. However, sometimes it is good when things drop, like interest rates, gas prices or your golf score. Speaking of dropping income, it is important to know that if you have any sort of variable income and it drops, it will hurt you in qualifying for a mortgage.
Fannie Mae, Freddie Mac, FHA, and VA all qualify mortgage borrowers by using their gross income. You would think they would use net income, which is after tax income. Especially since a mortgage payment is paid out of after tax income. But they do use gross income. I am sure if they suddenly shifted the guidelines to using net income to qualify mortgage borrowers, the allowable debt ratios would go up to compensate for using the reduced after tax income.
In the mortgage world non-taxable income will usually be grossed up 125%
What this means is that a mortgage borrower with non-taxable income needs to have that non-taxable income “grossed up”. It gets grossed up to approximately whatever level the income would be if it were being earned as gross income. The rule makers arbitrarily use a 125% gross up figure. This means you’d multiply the non-taxable income by 1.25 to determine the gross income to be used in qualifying the borrower.
Borrowers with $4,000 per month in non-taxable income would have $5,000 per month in “grossed up” income for mortgage underwriting purposes. The calculation would look like this: $4,000 x 1.25 = $5,000.
My client story
I had a client recently who was working with a lender who told them they were only pre-qualified for a mortgage of $450,000. However, I pre-qualified them to over a $550,000 mortgage! We finally figured out the former lender was not grossing up the non-taxed portions of their military income.
Non-taxable income may come from:
•Some portions of military income
•Some portion of Social Security, some Federal government employee retirement income, Railroad Retirement Benefits, and some state government retirement income
•Municipal Bond Interest
•Certain types of disability and public assistance payments
•Other income that is documented as being exempt from Federal income taxes
If you or someone you know has non-taxable income, make sure they know the above information.
There are times that I have used a mortgage borrower’s retirement account balance/s as income. I have done this even if the borrower is not currently taking required withdrawals from the account/s! But how can an asset be used as income? It can, and the guidelines allow it. However, there are rules.
There are many rules to consider.
- The mortgage must be for a 1-unit or 2-unit Primary Residence or a second home. No investment properties are allowed. And no 3-4 unit properties are allowed.
- The mortgage must be a purchase loan or a no cash-out refinance, not a cash out refinance.
- The maximum loan-to-value is 80%.
- At least one borrower on the account must be 62 years old.
- We take the account balance and divide by 240 to get the monthly income. For example: $800,000 401(k) account balance / 240 = $3,333.33/month in income to help qualify for a mortgage
All the Freddie Mac rules related to this can be seen by clicking here.
What if someone is already taking distributions from retirement accounts?
For retirement accounts that are already being used to take distributions as income, the Fannie Mae rules to document that as acceptable income are found here. Look under the area marked “Retirement, Government Annuity, and Pension Income.” The main points are:
- If retirement income is paid in the form of a distribution from a 401(k), IRA, or Keogh retirement account, determine whether the income is expected to continue for at least three years after the date of the mortgage application.
- Eligible retirement account balances (from a 401(k), IRA, or Keogh) may be combined for the purpose of determining whether the three-year continuance requirement is met.
- The borrower must have unrestricted access to the accounts without penalty.
If you are getting near retirement age or you are already retirement age, consider using your retirement accounts as income to help you qualify for a mortgage, even if you are not currently taking withdrawals from the account.