Smart SpendingSmart Spending

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.

By MSN Money Partner Jun 1, 2012 9:53AM

This post comes from Marilyn Lewis of MSN Money.

 

Image: Thumb Down (© Milton Montenegro/Getty Images)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.

 

'Unyielding 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.)

Solutions exist

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.

Huge implications

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:

3Comments
Jun 1, 2012 3:37PM
avatar

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/////////////////

Jun 1, 2012 4:40PM
avatar
The banks aren't willing to "risk" a mortgage backed by an asset (the house) but they are willing to risk and lose Billions on derivitives and other imaginary "investment" instruments. If they're that stupid, they won't be in business much longer. 
Jun 1, 2012 4:26PM
avatar

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. 

Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

ABOUT SMART SPENDING

Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.

LATEST BLOG POSTS

Can you trust Carfax?

If you're thinking about buying a car and the Carfax report comes back clean, you're good to go, right? Um, maybe not. Here are four other ways you can avoid buying a clunker.

VIDEO ON MSN MONEY

TOOLS

More