Recs

8

Social Security: How It Affects Your Mortgage

Social Security is an invaluable benefit to millions of Americans. And what it means for those looking for a mortgage may surprise you.

The common myth
For years, mortgage giants Fannie Mae and Freddie Mac have allowed Social Security to count as income for those applying for a mortgage.

Yet many faced difficulties if they'd retired and were receiving Social Security but wanted to either buy a home or refinance their mortgage. AARP even went so far to say that "retirees living on a fixed income probably had a better chance at being chosen for The Price Is Right than qualifying for a mortgage."

That was because when banks went to approve those looking for a mortgage, one of the biggest considerations is the applicant's income, regardless of whether the applicant was retired or still in the workforce.

And while Social Security can undeniably provide substantial benefits, often the income isn't enough to qualify for a mortgage.

But thankfully, that has all changed.

Source: Freddie Mac Media Relations.

The welcome relief
In 2011, Freddie Mac changed its rules to allow baby boomers and other individuals in retirement and using Social Security to greatly increase their ability to qualify for a mortgage.

Some retirees may have a substantial sum of assets in their 401(k)s, IRAs, or other retirement accounts but may not have a significant source of income coming in each month. Freddie Mac understood this, and as a result, it changed the way it calculates a borrower's eligibility.

It allows all of a borrower's qualified assets to be added up and then multiplied by 70%, and it then subtracts out certain mortgage costs. That remaining amount is in turn divided by 360 and then added to the applicant's existing monthly income to "help the borrower meet the mortgage's income eligibility requirements."

For example, if a retired married couple has $325,000 in a 401(k), they would have $550 added to their monthly income calculation when applying for a mortgage:


Source: Author calculations. 

The average Social Security benefit for a couple stands at a little north of $2,100, and banks seek to ensure that a mortgage is no more than 30% of monthly gross income. As a result, that boost in eligible income may be exactly what they'd need to be pushed across the line to be approved to either refinance their existing mortgage as a result of the incredibly low rates, or even purchase a new home.

Yet it must be noted that Freddie Mac chose to remind individuals of this boost just last year, because too few people -- both individuals and bankers -- even knew about it. So if your banker says your retirement assets can't be used for your mortgage application, it's time to find a new banker.

All too often we hear of scary changes with both Social Security and the titans at the heart of the mortgage industry in Fannie Mae and Freddie Mac, but thankfully this is one change that should be a welcome relief to many.

How to get even more income during retirement
Whether it's the boost to get a mortgage or countless other benefits, Social Security plays a key role in your financial security. But it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.


Read/Post Comments (1) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 13, 2014, at 8:35 PM, smauney wrote:

    Good Article. Now if we can just the government to stop taxing social security income, and stop squandering the surplus. Then you would see a real boost to the economy. Haha, like that will ever happen.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3023506, ~/Articles/ArticleHandler.aspx, 12/22/2014 4:32:56 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Patrick Morris
TMFMorris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He recently discovered something called Twitter -- and if you'd like the latest news and insight about banks, Buffett, and more you can find him there:

Today's Market

updated Moments ago Sponsored by:
DOW 17,959.44 154.64 0.87%
S&P 500 2,078.54 7.89 0.38%
NASD 4,781.42 16.04 0.34%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/22/2014 3:59 PM
FMCC $2.15 Down -0.07 -3.15%
Freddie Mac CAPS Rating: **
FNMA $2.19 Down -0.07 -3.10%
Fannie Mae CAPS Rating: ***

Advertisement