Recently I was talking to a friend who's a Mortgage Consultant about the challenges retirees face when trying to obtain a conventional mortgage. He explained how assets can be used as income to qualify for a conventional mortgage. Here's how it works.
When a borrower is preparing to finance a new home purchase or refinance one of the key pieces of information a Mortgage Consultant uses for loan qualification purposes is the ratio of their debts to their income (DTI). Relying on the debt to income ratio can pose unique challenges to retirees as they are relying on alternative sources of income than a traditional paycheck. The three most common sources of retirement income for a retiree are Social Security, defined-benefits pension plans, and personal savings. Social Security and traditional defined-benefits pension plans provide a stable income source and are easy to treat as income, but for many people, this is only two thirds of the picture. Many borrowers have saved significant assets over their working lives with the expectation that they will consume those assets over time to supplement Social Security and pension income. How does a Mortgage Consultant account for the depletion of personal savings to calculate income level in retirement? The answer is Asset Dissipation.
Asset Dissipation is an income stream resulting from the assumed liquidation of certain asset types to meet the living expenses of the borrower. This can be used in addition to other income streams like Social Security and/or pension income to qualify for conventional mortgages.
Let’s work though the example of Sally, a recent retiree, to see how Asset Dissipation works.
Sally is retirement age and has $150,000 saved up in a 401K that she can draw on penalty free. To determine how much monthly income can be estimated to come from this asset we take 70% of the account balance to correct for fluctuations in the stock market and divide the remainder by 360. So…
150,000 x 0.70 divided by 360 = 291.67
The $291 generated through asset dissipation would be added to Sally’s Social Security income and pension income to more accurately capture her true monthly income.
If you're retired and interested in buying a home with a mortgage, please contact me and I can put you in touch with a mortgage consultant who can explain this and other options you might have.