Retired millionaires can't get refis
One applicant has $2.5 million, the other an 826 FICO score. But they still can't refinance their mortgages. Fortunately, solutions exist.
This post comes from Marilyn Lewis of MSN Money.
Columnist Keith Harney (here in the Los Angeles Times) says banks have become so fussy with their mortgage lending that they're even turning down millionaires who want mortgages.
The housing turnaround has made born-again conservatives of lenders whose standards were previously criticized for being overly lax during the housing boom.
The problem, apparently, in two cases Harney cites, is that each mortgage applicant was retired. Despite rich bank deposits and other assets, one was rejected because the lender judged he did not have enough monthly income to fit its rigorous standards.
The other applicant had an inheritance of $2.5 million in the bank, but the lender still objected, mortgage market expert Dennis C. Smith told Harney.
Smith had a recent client -- a physician seeking a $350,000 loan with $2.5 million in bank accounts -- who was rejected by one lender because the deposits, which were proceeds from an inheritance, had been in his account for just eight months. This was too short a time period to satisfy the bank's unyielding standard.
The other borrower was Jim Eberle, a retiree who wanted to refinance his McLean, Va., home. Eberle, 68, has had eight mortgages in 40 years and has worked for banking industry trade associations, yet he couldn't get a 30-year refinance from a "large Midwestern bank."
He had substantial checking, savings and 401k account holdings and a net worth he describes as "in seven figures." The appraisal the bank did on his house showed it to be worth $664,700 -- more than double the $322,000 refi he was seeking. His credit score, according to TransUnion, was 826, indicating minimal risk of default.
Yet the bank "told me it could not make the loan because, even though I have sufficient (liquid) assets and a high credit score," his monthly Social Security payments, bank deposits, checking accounts and 401k plan, he said, "were not enough."
Even after Eberle offered to pull more money from his savings and investments to generate a larger monthly stream of income, the bank said no. (Post continues below.)
Fortunately, bank rejection isn't the end of this story. There are things you can do if your mortgage or refinance application has been rejected. MSN Real Estate lists five steps here.
Also, Bruce Calabrese, president and co-founder of Equitable Mortgage in Columbus, Ohio, told Harney about techniques for qualifying "asset-rich" and "income-deficient" retirees that not all loan officers may be aware of:
Calabrese's firm employs "annuitization" procedures acceptable to Fannie Mae to help borrowers over 59½ qualify on income tests using their IRA and other retirement account balances.
Harney describes those techniques (also acceptable to Freddie Mac) and concludes:
Just because a homeowner's post-retirement income is below what it used to be, this doesn't mean the person can't refinance, get a new mortgage or buy a house, provided that he or she has sufficient retirement assets. Borrowers just need to shop around and deal with experienced loan officers who know the ropes and are willing to work with them.
The problem has enormous implications for retirees who are stuck with piles of equity that they're unable to tap. Homeowning baby boomers, the eldest of whom now are 66, have much of their retirement savings locked up in home equity.
"The average home value for households approaching retirement is under $200,000, according to data from Boston College," reports Reverse Mortgage Daily.
To access their equity without selling the home, owners have limited options:
- They can take out cash when refinancing, if the lender will allow it.
- They can obtain second mortgages or home equity lines of credit.
- They also may get reverse mortgages, but that's a more costly approach.
- They could try to sell.
But many retirees, like other homeowners, may want to avoid selling now while home values are at their lowest point in years. Some say these low property values are ruining retirement for this generation of retirees.
Pay off that mortgage
Experts typically counsel homeowners to enter retirement with the mortgage paid off. If your mortgage is $1,000, for example, paying off that debt before you are on a fixed income is like giving yourself $1,000 more each month to live on.
But a paid-up mortgage is not possible for everyone, given recent losses in home equity and investments. Bottom line: Whether debt is OK for retirees depends on each individual financial situation. Writes Bankrate.com:
"Many people believe they should not have any debt in retirement, but it may not be a problem as long as the retirees have the capacity to make the mortgage payments," says Rich Arzaga, founder and CEO of Cornerstone Wealth Management Inc., in San Ramon, Calif. "If their cash flow is healthy and their investments are growing enough to beat inflation, having a mortgage is not really a risk."
Assuming you can get a lender to refinance your home loan, it "makes sense as long as the homeowners will stay in the property for at least 10 years, qualify for a lower interest rate and will use the savings for retirement," Arzaga told Bankrate.
More on MSN Money:
What investments are growing enough to beat inflation????/ I keep reading that you need your
investment to grow 8% a year---------That ain't happening/////////////////
Same thing happened to us. Aim Loans turned us down because of lack of income. Have plenty in
savings and 57% equity. We have decided to just pay it off.
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