Retirement Assets and Mortgage Lending

Retirement Assets and Mortgage Lending

Many borrowers have questions about how retirement assets are counted in the mortgage process – do they count as income?  As reserves?   Knowing how they are used can help you as you are preparing to qualify for a purchase or a refinance mortgage.   Here, I’ll answer questions about retirement assets.

I have a substantial 401-K account, and my loan officer told me I could not use it towards my qualifying income.  Why is that when it is obvious I will have it in the future for income?   This question is answered by the same rule that governs most sources of income:  in general, you cannot count “future anticipated” income as part of your qualifying income.

So there are no retirement accounts that can be used as a source of income if I am not currently taking withdrawals?   The only exception is an IRA or Roth IRA account.   If you are at the IRS mandatory withdrawal age, then you are allowed to use the mandatory withdrawal amounts as income, even if you are not currently taking them.

What can I do if I am retired, have an IRA account, but I’m not under the mandatory withdrawal age? Is there any way at all to use my IRA for qualifying income?   Under the recently changed guidelines, yes you can, if you structure it ahead of time, correctly.  The “test” for this income is three-fold:  you must have set up a regular, monthly withdrawal from your IRA, you must have received it for the past 2 months, and you must be able to continue to receive it for the next 3 years without exhausting your IRA funds.  If you meet that three-fold test, the monthly amount can be counted as income.

I’m really in a pickle now.  I set up my IRA so that I could count it as income, but now they tell me I cannot use it for reserves.  Why is that?   Any account that you stipulate to be used as income, cannot be used as reserve liquidity, since you will be exhausting those funds by the income withdrawals.   However, most loans require very little reserve liquidity (2 months’ house payments for most conventional loans and 6 months’ house payments for Jumbo loans), so it is usually easy to meet the reserve requirements without using the retirement accounts.

My current home is for sale, but won’t close before I buy my new home.  I need down payment funds but don’t want to pay the tax penalty for withdrawing this from my retirement account.  What do I do?  The answer to this depends on the type of retirement account you have.   If you have a 401-K account, there are both “hardship” withdrawals that are allowed with no tax penalty, and you can also borrow the money from the account without penalty.  You can pay back the 401-K once your home has sold.   If your retirement account is an IRA, you are actually allowed to withdraw the funds penalty-free, as long as they are replaced within 60 days of the withdrawal.   So if the sale of your present home will occur within 60 days of your purchase, you can borrow the down payment from your IRA and replace the funds before the penalty deadline is reached.

But I was told if I borrow the funds from my 401-K, then the monthly payment required by the plan has to be included in my debt ratios.  Then I won’t be able to debt qualify for the mortgage.  Is that true?   That was true in previous years, but current conventional and government loan guidelines do not add the 401-K loan payment to your debt ratios.

I want to refinance my home to pay off debts, but I’m told that I cannot use my refinance proceeds to pay down revolving debt, in order to qualify for the loan.  What can I do?   This is a situation where we often use the IRA funds’ 60 day withdrawal allowance.   You can withdraw the funds necessary to pay off the revolving debts, so you can debt qualify for the loan.   Then you can proceed with the refinance, cash out the funds, and pay back your IRA account after your loan closes.   You can also use your 401-K for this purpose.

I am retired and have plenty of money in the stock market, in fact, I mostly live off the capital gains and dividends from those investments.  But my mortgage broker is telling me I can’t use the gains from those funds as qualifying income.  What can I do?   First of all dividend and interest income from these accounts CAN be used to qualify for the mortgage.   You can average the last 2 years’ reported income from these sources, and that is part of your allowable income.   However, you will not be able to use the capital gains income for qualifying income, and this is usually where the rub comes in.   One option is to convert a portion of the assets to an annuity.   Annuity income can be counted from the day it is set up.  Your broker can tell you the amount of monthly income  you will need from the annuity, and you can see if this is a viable option for you.

I don’t have a 401-K or an IRA account, but I do draw pension income.  Can I use that to qualify?   Yes, as long as you are currently receiving the pension, and will continue to receive it for the next 3 years, you can qualify for a mortgage using that income.