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New Rules Will Help Some Retirees Refinance

Lenders might approve reworked mortgages even if your income is low — as long as you've got substantial savings 

By Michele Lerner

This article previously appeared on

If you've been turned down for a mortgage refinance because you're retired and on a fixed income, you've probably felt some frustration as you watched neighbors take advantage of the lowest mortgage rates.

Before giving up on refinancing, though, you should know that Fannie Mae and Freddie Mac, the government-sponsored mortgage finance companies, have revised their rules in ways that might now let you qualify.

The Usual Gauge for Refinancing

Traditionally, mortgage lenders have typically focused on applicants’ debt-to-income ratio (the percentage of your monthly gross income that goes toward debts) when determining whether they can qualify to refinance, along with their credit score. Most have insisted that debts not exceed 41 to 43 percent of gross monthly income.

As a result, retirees have found that their income was not always high enough to refinance even though they may have had significant assets in savings or sizable home equity.

Using Retirement Savings to Qualify

But according to syndicated columnist and mortgage expert Ken Harney, retirees who have yet to begin taking money from their retirement accounts can now use those assets to qualify for a refinance.

(MORE: Does It Make Sense to Get a 30-Year Mortgage at Age 66?)

The revised rules allow mortgage lenders to calculate your income based on your retirement assets using a formula that multiplies your assets by 70 percent to conservatively allow for market volatility.

For example, if you have a retirement account with $800,000, the lender would multiply that amount by 70 percent to reach $560,000 and then — for a 30-year loan — divide that sum by 360 to arrive at 30 years of monthly withdrawals. In this case, that would mean the equivalent of an extra $1,556 in monthly income.

If you apply for a 10- or 15-year loan, your reduced retirement fund would be divided by 120 or 180 for monthly withdrawals equivalent to your loan pay-off date.


(MORE: How to Shop for a Mortgage Refinance)

If you've already started making withdrawals on your funds, the rules are a little more complicated, but you could still use your retirement assets for income.

Retirement-Plan Withdrawals and Refinancing

According to a recent AARP article, you aren't required to actually make these retirement-plan withdrawals; the new rules just offer an extra way of ensuring that you’ll have the income to support a new mortgage refinance.

The AARP article reports, however, that not all lenders are familiar with the new rules for including your retirement funds as income.

So it may take some extra searching to find a lender willing to help you through the maze of refinance requirements. But locking down a low-interest mortgage for your retirement could be well worth the time.

Michele Lerner, author of Homebuying: Tough Times, First Time, Any Time, has written about personal finance and real estate for publications and websites including Investopedia,,, and The Washington Times. Find her on Google+

Michele Lerner, author of Homebuying: Tough Times, First Time, Any Time, has written about personal finance and real estate for publications and websites including The Washington Post, The Motley Fool, Investopedia, and Read More
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