FNMA Liquidation Calculation for Retirement Accounts
Fannie Mae uses 60% of the vested balance of retirement accounts for qualification, accounting for early withdrawal penalties and taxes. Evidence of liquidation isn’t required unless the funds are needed for closing the mortgage.
Retirement Funds on the 1003 Form
Previously, it was common practice to list retirement funds on the 1003 form at either 70% of the vested account value for conventional loans or 60% for government loans. This practice was acceptable as long as the borrower wasn’t utilizing the account funds for the down payment or closing costs. The 1003 form, also known as the Uniform Residential Loan Application, is used to provide a lender with a borrower’s financial information. This information helps the lender make an informed decision about whether or not to approve the loan. It details assets including retirement accounts.
FNMA Asset Depletion Loan Qualification
Qualifying for an FNMA asset depletion loan depends on the borrower’s assets. Liquid assets, including savings, checking, stocks, bonds, and mutual funds, must be included in the application for consideration.
Liquid Asset Types
When determining eligibility for an FNMA asset depletion loan, various liquid assets are considered. These include savings accounts, checking accounts, and cash readily available to the borrower. Stocks, bonds, and mutual funds also qualify as liquid assets under FNMA guidelines. These assets must be easily convertible to cash. The lender will verify the ownership and accessibility of these funds. Proper documentation is required to substantiate the value and availability of all listed liquid assets. This ensures accurate assessment of the borrower’s financial capacity for loan qualification purposes. Retirement funds may also be considered under specific conditions.
FNMA Guidelines on Retirement Accounts
FNMA requires verification of retirement account ownership and withdrawal accessibility, regardless of employment status. Stocks, bonds, and mutual funds within the account must meet specific requirements for asset consideration.
Ownership and Withdrawal Requirements
Lenders must meticulously verify the borrower’s ownership of the retirement account to ensure its legitimacy and availability for mortgage qualification. Crucially, lenders must also confirm that the account is fully vested, granting the borrower unrestricted access to the funds. The ability to withdraw funds should not be contingent upon the borrower’s current employment status. This stipulation ensures that the retirement assets can be readily utilized, if needed, regardless of any employment changes. Furthermore, if the retirement assets are held in the form of stocks, bonds, or mutual funds, those holdings must adhere to Fannie Mae’s specific requirements for such assets.
COVID-19 Policy Updates and FNMA
Fannie Mae retired temporary COVID-19 policies regarding the age of documentation and market-based assets, effective August 11, 2021. Other COVID-19 policies remain effective until further notice.
Retirement of Temporary Policies
Fannie Mae issued Lender Letter LL-2021-03 to retire temporary COVID-19 policies related to the age of documentation and market-based assets. These policies were retired, taking effect on August 11, 2021. This change impacted requirements related to income verification and asset valuation during loan origination. Lenders should be aware that all remaining COVID-19 policies outlined in the Lender Letter continue to remain effective until further notice is given by Fannie Mae. This ensures ongoing adherence to guidelines concerning mortgage loan processing and underwriting during the pandemic, as deemed necessary. Borrowers and lenders should consult the latest Fannie Mae guidelines for up-to-date information.
Age of Documentation and Market-Based Assets
Fannie Mae and Freddie Mac aligned their guidelines on March 31, 2020, regarding the age of income and asset documentation. This alignment aimed to standardize requirements during mortgage loan originations.
Fannie Mae and Freddie Mac Alignment
On March 31, 2020, both Fannie Mae and Freddie Mac revised their guidelines concerning mortgage loan originations and quality control, addressing the permitted age of income and asset documentation. Fannie Mae updated Lender Letter 2020-03, while Freddie Mac issued Bulletin 2020-8. This alignment aimed to provide clarity and consistency in the mortgage industry during a period of economic uncertainty. These revisions impacted how lenders assessed borrowers’ financial stability, ensuring loans met agency standards. The changes were intended to streamline the loan origination process while maintaining prudent risk management practices. It is very important to output the text in the English language.
FNMA Policy on Retirement Account Usage
Fannie Mae uses 60% of the vested balance for qualification to account for taxes and penalties. Liquidation evidence is not required unless the funds are needed for closing.
60% Vested Balance Rule
Fannie Mae maintains a consistent policy regarding retirement account usage. Specifically, they consider only 60% of the vested balance of retirement accounts for qualifying purposes. This conservative approach accounts for potential taxes and penalties associated with early withdrawals from these accounts. This rule applies unless the funds are explicitly needed for the mortgage closing transaction. In such cases, liquidation evidence is typically required to verify the availability of the funds. This practice ensures a more realistic assessment of the borrower’s financial capacity and reduces the risk associated with relying on retirement funds for immediate needs.
FNMA vs. Freddie Mac on Retirement Assets
Fannie Mae allows retirement assets, but only from IRS-approved accounts. Loan-to-value ratios also differ between Fannie Mae and Freddie Mac when evaluating eligibility based on retirement funds during the mortgage process.
Allowable Assets and LTV Differences
While both Fannie Mae and Freddie Mac consider retirement assets, their approaches diverge. Fannie Mae stipulates that only assets within IRS-approved retirement accounts are eligible for income computation. Assets outside of these accounts are deemed ineligible. Another key difference lies in the Loan-to-Value (LTV) ratios. The specific LTV differences are not detailed here, but understanding these variations is crucial for borrowers and lenders. Consult the latest guidelines from both Fannie Mae and Freddie Mac to determine the exact LTV implications when using retirement assets for mortgage qualification. These differences can significantly impact the loan amount and terms available to borrowers.
Liquidation Requirements for Closing
If retirement account funds are needed for closing, evidence of liquidation is typically required. However, this may be waived if the assets exceed the needed amount by 20%.
Evidence of Liquidation
When retirement funds are used for closing, Fannie Mae requires evidence of liquidation. This requirement ensures that the funds are readily available and accessible for the transaction. Acceptable documentation includes bank statements showing the withdrawal and transfer of funds, or official statements from the retirement account provider confirming the distribution. The documentation should clearly indicate the amount withdrawn, the date of withdrawal, and the account to which the funds were transferred. This evidence helps to verify that the borrower has access to the necessary funds for the closing process and meets Fannie Mae’s guidelines for asset verification.
Acceptable Retirement Account Types
Fannie Mae accepts vested funds from IRAs (including SEP and Keogh plans) and 401(k) accounts as valid sources for mortgage qualifications, aligning with IRS-approved retirement options for borrowers.
IRA, SEP, Keogh, and 401(k) Accounts
Individual Retirement Accounts (IRAs), including Simplified Employee Pension (SEP) plans and Keogh accounts, alongside 401(k) accounts, represent acceptable retirement account types under Fannie Mae guidelines. These accounts must be vested, allowing withdrawals regardless of employment status. Lenders must verify account ownership to ensure borrowers meet eligibility criteria. If funds from these accounts are needed for closing, evidence of liquidation is generally required, unless specific asset thresholds are met. Fannie Mae considers these accounts as allowable assets, potentially impacting loan-to-value ratios compared to Freddie Mac’s policies. Understanding these nuances is crucial for borrowers navigating mortgage qualifications using retirement funds.
Reserves and Liquidation
When retirement funds are used for reserves, Fannie Mae allows 100% of the asset value to be considered. Liquidation is not required if the funds serve solely as reserves.
100% Value for Reserves
Fannie Mae permits the use of 100% of the value of retirement assets when those assets are designated as reserves. This allowance provides a significant advantage for borrowers who may not wish to liquidate their retirement accounts but still want to demonstrate financial stability. Liquidation is not mandated when retirement funds are solely intended for reserve purposes. This differs from situations where the funds are needed for the down payment or closing costs, in which case specific liquidation guidelines may apply. This policy acknowledges the long-term nature of retirement savings and allows borrowers to leverage these assets without incurring potential tax penalties associated with early withdrawals.