As borrowers move towards retirement and consider a change in housing, knowing how income is counted (or not counted) as a retiree can make all the difference in being able to relocate or downsize to the home you want. Here, Mark Wells at Preferred Financial Services discusses income guidelines for retirees and answers questions that often arise.
Is it easier to apply for a mortgage right before I retire rather than waiting until afterwards?
This can be a good option if you plan a year or so in advance. But if you have given notice of retirement to your employer, or if you have a mandatory age of retirement and you are less than a year away from that age, the lender will not approve a loan for you knowing you will be losing your main employment income.
I have a 401-K that will be the main source of my retirement income. How will the lender look at a 401-K to determine income for me?
This is the biggest dilemma that most retirees have. A 401-K is an asset, not an income source. Technically, you get no income from a 401-K when you retire; you receive an asset (savings) that you have accumulated, so it can give you “zero” qualifying income.
Surely they know if I have $500,000 in the bank that I’m good for a $200,000 loan?
That would seem logical, but mortgage lending is not asset lending, it is income lending, and there is a “test” for all income: you must show present receipt and must have anticipated continuity of that income.
So is my 401-K useless when I apply for a mortgage?
Fortunately not. Most 401-Ks are placed into a rollover IRA account so that immediate taxes are not due on the distribution of the funds to you. An IRA can be used as “income” in a manner that a 401-K plan cannot be: a) If you are age 59 or older, you can divide the current value of the IRA account (say, $500,000) by 20 (= $25,000), and this is considered your annual income from the IRA. Or, b) if you are at the mandatory withdrawal age (70.5), you can use the IRS mandatory withdrawal tables to determine annual income when qualifying for a mortgage. Finally, c) You can set up a monthly withdrawal of any amount you choose, take the first three withdrawals at that amount, and count that as your monthly qualifying income, as long as the current balance of your IRA can continue to fund that withdrawal for at least five more years.
Can the 401-K be converted to income in any other way?
The only other conversion that will give you qualifying income is to convert some or all of your 401-K to an annuity. Annuity income can be counted as qualifying income any time after you have received your first annuity check.
Next week, Wells will cover other income matters for
retirees, including pension, social security, part-time
jobs, and consulting income. He can be reached for
questions or comments at (864) 235-9596, or by
e-mail at Mark@TheGreatestRates.com.
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