Mary Babinski, a senior loan officer with Motto Mortgage Champions in Trinity, Fla., recently wrote a 30-year loan for a retiree buying a home in New Port Richey. He had no problem qualifying, but he was surprised he could nonetheless.
Why the amazement? Because he was 97 years old, Ms. Babinski said.
Federal law, under the Equal Credit Opportunity Act, forbids discrimination in the mortgage market on the basis of age. Nonetheless, loan officers say older borrowers often don’t realize they can get loans with terms that will expire on their 110th, 120th or nearly 130th birthdays.
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Borrowers over 65 account for roughly 10% of all mortgages originated annually, according to reports by the Federal Housing Finance Agency.
Eager to serve this group, some lenders are working harder to find ways to qualify retirees, including rolling out lending programs that let borrowers use their investment portfolios to qualify, without even taking monthly distributions. Loan officers, particularly in areas with lots of retirees, have become experienced in adding up income streams, helping borrowers establish new ones, and guiding them through the process.
The simplest and most straightforward way a retired borrower can qualify is to add up their monthly fixed income sources, which are treated like salary by lenders.
Shant Banosian, senior vice president in Waltham, Mass., for Guaranteed Rate, said his retiree customers are “qualifying based on their pensions, social security, dividends and interest that they are withdrawing on now.”
TIPS FOR OLDER BORROWERS
1. Work with a mortgage broker experienced in loans for retirees, especially if your income isn’t enough to qualify. You want a broker familiar with lending programs that qualify on the basis of income, distributions and assets.
2. Fannie Mae rules, which many lenders follow even for jumbo loans, require that IRAs, 401(k)s and Keoghs are large enough so that the distributions used to qualify for the mortgage can last for at least three years.
3. For an asset depreciation loan, many lenders discount stocks, bonds and mutual funds by 30%, then divide the remaining sum by the months in the loan term. Some lending programs may give a more modest haircut and divide by fewer months, making these assets more valuable for qualifying.
4. Some niche lenders have asset or liquidity-based programs that loan against assets much more aggressively. Many such programs are offered in a “relationship lending” package, where the lender requires the borrower to hold deposits or assets with them.
If that income isn’t enough, the next step is to create a distribution from a retirement account, such as an IRA or 401(k). Matt Andre, branch manager in Orlando, Fla., for lender FBC Mortgage, said that in September a retired borrower needed to show $8,000 of monthly income to qualify for a 30-year home purchase loan. She set up a distribution for that amount from a $500,000 IRA and had her financial adviser draft a letter to the lender about the new income stream. This qualified her, even though at that rate, the entire account would likely be drained within five or six years. Fannie Mae rules—which many lenders use as guidelines even if they are not going to sell the loan—only require that distributions are guaranteed to continue for three years.
Real-estate holdings are a double-edged sword, loan officers said. If the property produces income, that revenue stream counts toward qualifying. But the underlying value of the property—even if there is a lot equity or it is owned outright—isn’t considered by the lender. “It could actually be a liability,” said Mr. Andre. Property tax and homeowner’s insurance are considered debt in the debt-to-income equation, he said.
If qualifying is still a problem, lenders are increasingly willing to consider stocks, bonds and mutual funds. This differs from creating a distribution that will be counted as income because the borrower doesn’t have to take a monthly amount out of their portfolio. Instead, the lender uses a formula called “asset depreciation,” (sometimes labeled asset annuitization, depletion or dissipation) to impute a monthly distribution from the portfolio.
A typical, conservative industry formula works as follows, said Eric Schuppenhauer, Home Mortgage President at Citizens Bank: A portfolio is first given a 30% “haircut” to create a margin of safety for the lender. Then, the remaining 70% is divided by the months in the loan term. At Citizens, a borrower with a $1 million portfolio seeking a 30-year loan would see $700,000 divided by 360, yielding $1,944 in imputed monthly income.
In April, TIAA Bank reduced the amortization period for a 30-year mortgage based on imputed monthly income, called an asset depreciation loan, to 240 months (or 20 years) for some retiree loans, said John Pataky, executive vice president. In that scenario, the $1 million portfolio—after the haircut—would yield $2,916 in imputed monthly income.
Some jumbo lenders, particularly who cater to high-net-worth individuals, have implemented far more liberal asset depreciation programs, said Richard Barenblatt, a mortgage specialist with Guardhill Financial in New York. Last year, he got an 83-year-old retired Manhattan co-op owner a $1 million, 10-year, interest-only adjustable-rate mortgage, for a re-fi, at “a highly competitive rate” through a “liquidity-based program,” which is similar to asset depreciation. Mr. Barenblatt declined to name the lender or specify the interest rate, but said that the lender was a bank with a “relationship program,” which means it offers more favorable loan terms to borrowers who bank with them. Mr. Barenblatt’s client deposited “a few hundred thousand dollars” with the lender, which qualified her for a loan based on a $1.6 million portfolio of stocks and bonds.