Older People, Self-Employed Face Refinancing Hurdles

With $2 million in retirement assets and a stellar credit rating, Art Grossman should have breezed through the refinancing of his house - but there was one sticking point.

"I'm not working," says Grossman, 61, who was previously employed in the financial services industry. "I have severance, but that runs out in April."

Mortgage brokers see problems like this again and again with clients who need to demonstrate a steady income stream and stellar credit, the two biggest stumbling blocks.

While mortgage rates are at all-time lows and many people want to refinance in a hurry, this is not an option for everyone. In the 50-plus population, 16% of home loans are underwater, or lack the equity necessary to refinance, according to nonprofit organization AARP.

Also, 44% of those aged 65 to 74 are still making mortgage payments, in part because low interest rates and high home values prior to the housing collapse might have encouraged older adults to tap home equity to pay for retirement.

At the same time, the self-employed, who number more than 9 million according to August Bureau of Labor Statistics numbers, are having trouble making their mortgage payments.

"We don't have any proactive program to help people before they get into trouble," says Guy Cecala, publisher of the newsletter Inside Mortgage Finance. "I would guess that eight out of 10 times a borrower went to their lender with those circumstances, they'd be told they couldn't be helped."

In August, another 60,600 homeowners entered the foreclosure process.

NOT BOUNCING BACK ENOUGH

Billie Passmore, housing counseling outreach director at In Charge Debt Solutions in Orlando, Florida, deals with struggling homeowners every day. Often they are older adults who entered retirement without enough earnings to cover their expenses, or people who have run up credit card debt, often to cover medical bills.

"We've seen quite a few people hit hard on their 401Ks," says Passmore. "They didn't make any adjustments to their savings, and now they're retired and don't have enough money."

As a result, they do not qualify for the refinancing that might help them keep their homes.

"It's very, very sad," Passmore says. "You wish we could have gotten to them 20 years ago."

To qualify for his refinance, Grossman had to create an income stream. He did this by setting up a regular withdrawal of $8,000 a month from his individual retirement account.

While refinancing was a hassle for the North Reading, Massachusetts, resident, he was eventually able to complete the loan after meeting the underwriting guidelines.

"Once this loan (is funded), I'm taking the money I withdrew and putting it back in the IRA," says Grossman. Thanks to his severance and his plan to return to work, he can afford to do that.

WORST-CASE SCENARIO

Philip Mandel, 59, of Beaverton, Oregon, says his refinancing was so painful that he blocked it out of his mind.

But when forced to remember, he says his odyssey was complicated by a house appraisal that was not as high as he had expected, numerous requests for him to document his year-to-date self-employment income, and a drop in his credit score because he maxed out his credit cards to pay for home improvements that he had expected to fund with cash out from his refinancing.

"I never missed a payment, but the high balances just kill your score," says Mandel, who after four months of back-and-forth was finally able to refinance. "It kept making it harder and harder to qualify."

This aggressive push to meet the guidelines of U.S. government-controlled mortgage financiers Fannie Mae and Freddie Mac makes refinancing difficult.

"This is the paradox," says Michael Rosenbaum, mortgage loan originator at W.J. Bradley Mortgage Capital in San Diego. "Because sometimes you're trying to do a refinance for clients who are currently carrying a payment larger than the one I'm going to refinance, and they haven't missed a payment in 40 years. But if there's no income, there's no payment amount you will qualify for. Somebody explain this one to me."

A few programs out there are aimed to help people keep their homes through a loan modification rather than refinancing.

1. HARP Mortgage

The Home Affordable Refinance Program is a federal debt relief program that allows homeowners who do not have enough equity to qualify for a conventional refinancing to still take advantage of a lower interest rate mortgage. To be eligible, applicants must be current on their mortgage for the last 12 months, and their mortgages must be owned by Freddie Mac or Fannie Mae.

2. Hardest Hit Funds Program

If you live in one of the 18 states hit hardest by falling home prices and rising unemployment, you might qualify for the federal government's Hardest Hit Funds Program. But there is a catch: If you are retired, you will have to attempt to rejoin the workforce to qualify. This program pays an unemployed person's mortgage for up to 36 months while he or she is enrolled in job training or searching for a new job. The zero-interest loan does not have to be repaid if you stay in your home for the next 10 years.

For those who are underemployed, self-employed or newly employed after a job loss, the best advice is to wait until you have the paper trail necessary to meet underwriting demands.