Assets as Income: Mortgage Underwriting

For some borrowers who have recently retired, qualifying income can be difficult.  Retirement income can be in the form of a pension or from social security while other borrowers have their primary retirement income in the form of withdrawals from a 401k or a IRA.  In these cases, the borrowers may have large amount of assets, but no history of liquidation.  When this occurs, there is an option both under Fannie Mae and Freddie Mac guidelines which allows assets being used as income for qualification.  However, there are very specific requirements.

Even though the requirements for Fannie Mae and Freddie Mac have similarities, there are some important differences.  First, for the similarities, they both require computation of the Net Documented Assets.  The represents the retirement assets from an IRS approved retirement account such as an IRA, or 401k.  The borrowers must have full ownership of the account and are not subject to withdrawal restrictions.  Second, the residence is limited to primary residence or second home properties and the transaction must either be for a purchase or a rate/term refinance transaction.  The subject property must be a 1 or 2 unit property.  Both PUD and Condominium projects are allowed.  Appraisal requirements are standard based on the transaction.

However, after this, Fannie Mae and Freddie Mac diverge from each other.  Fannie Mae only allows retirement assets for allowable assets.  Assets outside of an IRS approved retirement are ineligible for income computation.  Another important difference is the Loan to Value.  Fannie Mae limits the LTV to 70% if the borrower is below age 62.  If the borrower is 62 or older, the maximum LTV is allowed up to 80%.  The final major difference is in the computation of the income.  The amount of net assets is divided by the term of the loan in months, typically either 360 or 180.

Freddie Mac has a different approach.  Freddie will allow the use of all liquid assets, not just the retirement accounts as long as the borrower is age 62 or higher.  If the borrower is below 62, only retirement accounts can be used.  The other major difference is that instead of dividing the amount of assets by the term of the loan, Freddie Mac will always divide by 240.

While both programs represent a novel approach to qualifying income, choosing Fannie Mae or Freddie Mac is determined by the needs of the borrower and which set of guidance is preferable.  There are many other considerations when choosing whether to use assets as income.  For a complete set of guidelines, please refer to the Fannie Mae or the Freddie Mac selling guide. For further information, please contact our contract underwriting or contract processing teams.  Questions can be sent to [email protected] .  For current contract underwriting and contract processing customers of The Commonwealth Group, please use the Scenario Desk email for specific questions.

The Commonwealth Group is the industry leader for mortgage fulfillment services including:

·         Contract Underwriting

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