Call it the retiree refinancing squeeze: Growing numbers of retired homeowners — including millionaires — are getting rejected when they apply to refinance their houses and condos, hoping to take advantage of today’s unprecedented low-interest rates.
Even though these retirees have plenty of cash in the bank and in retirement plans, lenders are still saying, "No refi for you!"
What’s going on here?
Rejected with a Seven-Figure Net Worth
Many lenders have become hyper-strict as they review refinancing applications in the wake of the mortgage bust. So if your monthly income is too low, you’ll probably be shown the door, even if you've socked away thousands of dollars more than the amount you’re asking to borrow.
After I wrote about the refi rejection of Jim Eberle in McLean, Va., in my Washington Post syndicated column recently, more than 100 retirees around the country emailed to say they’d had similar experiences.
(MORE: Refinancing: Is Now the Time for a 15-Year Mortgage?)
Eberle spent a career working in Washington, D.C., for banking industry trade associations and retired at 68. His financial profile is sterling: retirement funds well into the six figures, a net worth he estimates in the seven figures, $300,000-plus in equity in his home that was appraised at $664,700, a credit score in the 800s and decades of on-time payments on a succession of mortgages. By most standards, he looks like a cream-puff candidate for a home loan.
Even so, Eberle was turned down when he sought to refinance his $322,000 mortgage to snag a much lower rate: 2.9 percent. “I didn’t really need to refinance," he says. "I’ve had no trouble making the payments on the loan I’ve got.”
But there’s nothing wrong with trying to save a little extra money every month through a lower interest rate, he figured. The lender, a large bank based in the Midwest, figured differently, saying that Eberle’s monthly income wasn’t high enough. Even after Eberle said he’d pull out money from his bank accounts and set it aside exclusively to supplement his income for the refinancing, the bank still said no.
What’s most disturbing about the problem Eberle and other retirees are facing is that their refi rejections often appear to be the result of a loan officer's poor training or lack of information. Bruce Calabrese, president and co-founder of Equitable Mortgage in Columbus, Ohio, told me that some loan officers aren't aware of techniques available for qualifying retirees who are asset-rich but income-deficient.
How To Avoid Refi Rejection
Fortunately, there are two ways you may be able to avoid being turned down for a refinancing if you’re retired.
Look for a lender who will annuitize your assets. Both of the two largest sources of mortgage money — Fannie Mae and Freddie Mac, who buy or guarantee loans made by many banks and other lenders — have procedures allowing loan officers to factor retirement assets into underwriting decisions.
For example, Fannie Mae lets lenders essentially annuitize the retirement fund assets of applicants over 59 1/2, turning them into the equivalent of income sources for prospective refinancers. Freddie Mac approves loans under similar guidelines.
(MORE: Should You Pay Off Your Mortgage Early?)
Calabrese says he frequently uses the annuitizing option for refi applicants with situations similar to Eberle’s. “We are able to annuitize any IRA and retirement funds to count as income,” Calabrese said in an email. “We take 70 percent of the total value of the funds and then spread them out over 360 months if the loan is a 30-year fixed. We spread them out over 180 months if the loan is a 15-year fixed.”
So, say you have $1 million in a brokerage account. Fannie’s and Freddie’s rules allow the loan officer to discount that value to $700,000 and estimate a conservative rate of return on the money — 2 percent, for example. The lender would then estimate that you’ll earn an extra $14,000 in income a year, which when added to your Social Security and other income might well qualify you for refinancing.
So if you're worried about being rejected because your income is too low, pull together documentation on your retirement assets, along with all your other financial resources. Then, as you shop around for the best refi deal, ask whether the loan officer is familiar with, and the bank regularly uses, the Fannie Mae or Freddie Mac retirement fund annuitization procedures. If the answer is no, move on.
The other way to avoid a rejection is to borrow less. As a result, your income will become higher as a percentage of your debt, preventing you from being turned down because of a low income.
The way to do this is by tapping your savings to pay off a portion of your current mortgage, which will then reduce the size of the loan you’ll apply for in your refinancing.
Neither of these steps will guarantee that your refinancing will be approved, but they could definitely improve your chances.