Pat Randles of SUNSTREET MORTGAGE, LLC is a businessman as well as a loan officer. He and his wife own a manufacturing company in Tucson. Patrick is a problem solver.
His most recent post addresses a problem that loan officers and REALTORS grapple with on a regular basis, and Patrick offers a very useful solution.
Mike in Tucson
Being an avid golfer, I tend to get a good portion of my business from other golfers. A recurring theme in my world is retirees with plenty of assets and minimal income. As a mortgage consultant, it is a little embarrassing to tell someone who has assets in the millions that they don't qualify for a mortgage on a 2nd home, even with 50% down.
Here is an example:
$5,500 per month from a small pension, social security, dividends and interest.
$2,100 per month for the mortgage , taxes, HOA and insurance on the primary residence.
As you can see, before we have even started factoring in a new property, we are at 38% debt to income. Fannie Mae allows a total debt load of 50% these days. Freddie Mac is a touch higher but so are their rates. Best case scenario assuming no other debts:
55% Highest allowed debt ratio (Freddie Mac Guidelines)-50% under Fannie Mae Guidelines.
-38% current debt ratio
17% multiplied by $5500 = $935.
As we all know $935 in terms of PITI and any HOA fee does not allow this buyer to borrow much more than $100,000 based on current interest rates and real estate taxes in the Tucson area.
Solution: Set up a monthly distribution from your IRA. A distribution of $3,000 per month could make the difference between qualifying for the mortgage on your second home with ten or twenty percent down as opposed to having the option of 2/3rds down or just pay cash. FNMA guidelines don't allow you to set up this distribution at the time of applying for a mortgage. You need to have it in place for 12 months in order for it to be counted as regular income.
Back to the quick math:
$8500 monthly. Just because you take a regular distribution doesn't mean you have to spend it!
$2100 = 25% of income.
55% less 25% = 30% of $8500 remaining to use towards your second home. By setting up this distribution this buyer can now qualify for a 2nd mortgage up to $2,500 monthly. That seems much more reasonable to me.
I know this doesn't apply to everyone but for those of you that work in golf and retirement communities, we are seeing this more and more often. Buyers with cash, assets, no debts, but little taxable income. Get this information to your clients so they can have at least 12 months history of taking this distribution and I won't have to be embarrassed when they call me to get a loan.
Sunstreet Mortgage, LLC
Tucson, AZ 85718