Upcoming retirees have a lot to think about.
Will their money last through the next three to four decades? Will they find ways to stay both mentally and physically healthy? What European vacation do they want to do first? (Some issues are obviously more concerning than others!)
Another concern retirees have is homeownership. If they retire, will their post-career income and savings be enough for a mortgage? Many retirees hope to move, relocate, or purchase a secondary home, but they’re not sure if their income will be sufficient once they leave their jobs.
There are many mortgage options available for retirees, but some involve drawing from your retirement funds, often in the form of IRA distributions. While using IRA distribution income for mortgage qualification can be a good choice, there is actually a way to use money in your IRA for qualification without actually drawing from the account.
IRA Distribution Income: Using Your Nest Egg for Mortgage Qualification
Using IRAs Before Retirement
An IRA is a savings account that is specifically intended for use as income after you retire. For this reason, the IRS does not want people withdrawing from their retirement accounts too early, and the government has implemented tax penalties to discourage people from taking money out of their retirement accounts before they should.
But if you have money in a retirement account, you are obviously less of a risk when it comes to mortgage lending than someone who has no retirement savings. For this reason, you should be given the chance to use this income for qualification.
IRA Distribution Income: How it Works
Freddie Mac is a government-sponsored housing company that provides support for loans. It does this by purchasing loans on the secondary market, giving lenders greater security when they create loans. Essentially, it’s in a lender’s best interest to make sure certain loans qualify for their programs. Freddie Mac has many rules about what loans qualify for their support, and they include options for using IRA distribution income as a source of qualification.
Conventional or high-balance loans do not necessarily have to take a distribution to qualify. One of the options that you have available when qualifying for a mortgage is to use the total amount in your IRA as a base for qualification.
Here’s how it works…
We will look at the IRA balance and use 70% of that income. This number is then reduced by roughly $10,000 to factor in closing costs and fees, then divided by 360. This final number then becomes the monthly income that we can add to your total income for qualifying purposes. Some lenders may require evidence for up to a full year of IRA distribution, and they will use that number for your income moving forward.
Here’s an example: say you have $1 million in an IRA retirement account. Of that $1 million, $700,000 (70% of $1 million) would be eligible as qualifying income. However, closing costs and other fees need to be included, so another $10,000 is taken out, leaving us with $690,000. That $690,000 is then divided by 360 months, giving you a income of roughly $1,917 a month, which you can then use towards your qualification numbers. This $1,9417 can be added to other income sources, significantly increasing your borrowing power.
This loan-qualification option is extremely beneficial for many borrowers, but they do come with significant down-payment requirements. In most cases, you’ll need roughly 30% of the property value in order to use the IRA distribution and asset depletion option. This essentially helps the lenders manage risks, which can be high for loans of this type.
However, as long and the income amount does not exceed the conforming high-balance loan limit for the county where the property is located, we will not require that a distribution be in place in order to use the income. This applies to both the purchase and refinancing of an owner-occupied, second-home, or investment property. As you can see, this is an excellent option that can help you purchase a wide range of properties, all by using your retirement savings to qualify, without actually drawing from your account!
Any lender selling mortgages to Freddie Mac can make these loan options available to borrowers, so you should have no problem finding a lender who can provide this opportunity.
Jumbo loans can also use the IRA distribution to qualify, but most lenders will require between 6 to 12 months of IRA distribution, which you’ll need to verify through documentation. For example, we have a jumbo investor that will allow a single distribution before the close of escrow in order to use that income for mortgage qualification.
This is an extremely unique option for people who are looking for a jumbo loan, allowing borrowers who may not have documented income to qualify for a jumbo mortgage.
While many homeowners and retirees (or upcoming retirees) choose this option to purchase a new home, some will find that it is also beneficial for people seeking to refinance their mortgage.
IRA Distribution Alternative: The “Drawdown” Method
Another option that lenders have available is the drawdown-from-retirement method, which is a good option for retirees who are have already retired but are delaying the start of Social Security payments.
With this method, the borrower will need to be 59.5 years of age. If you meet this requirement, you can use recent withdrawals from retirement accounts as a proof of your income. For example, if your recent bank statement shows withdrawals of $5,000 a month from an IRA, you can use this income for qualification purposes. This $5,000 would be considered monthly income, and sometimes the lender will need a letter from the financial institution to confirm the income withdrawals.
Expert Lending Support for All of Life’s Stages
If you want more information about qualifying for a mortgage using IRA distribution income, contact the helpful team at San Diego Purchase Loans. We’ll make sure you have the right information to make a fully informed decision on your next home loan.
Whether you just graduated college or you’re enjoying a well-earned retirement, we want to make sure you have the right mortgage loan for your specific needs!
Thank you Chad and Team
Chad and his team have been a pleasure to work with. I’m a 3rd time home owner. Wish I had known Chad and team a lot sooner. He made my 3rd home purchase very easy. There were a lot of moving pieces and they handled with professionalism and care. Juliann was a pleasure to work with too. The whole team made it possible for us to move into our dream home. Thanks you Chad and Team!
“Chad and his entire team were over the top amazing, professional, and attentive throughout the entire home loan/buying process. I could not have asked for a better team to have on my side through what could be one of the most challenging and stressful processes one experiences. From the first conversation I had with Chad, I felt comfortable with him. He helped guide us through the process without ever once making us feel uneasy, unimportant, or uninformed. I never felt silly or stupid for asking the same questions over and over until I fully understood what we were getting into, or until something made total sense to me. The home loan world is fast paced, overwhelming, and confusing, and Chad and his team held our hands and helped us to feel comfortable and confident about our choices. He and his team were always there for us day or evenings, weekdays, or weekend and never made you feel like you were a bother if you had a burning question you had to get answered at 8pm Saturday night. I will use them again and again, and suggest them to any friend, family, or acquaintance. Seriously, they are rock stars. They work hard for you to get you into your dream home, we could not be happier with their hard work, dedication, and kindness.”
“This is the second time that I have worked with Chad (home purchase & refinance). He has become my subject matter expert and someone I depend on for all finance needs related to our home and real estate investments. My favorite things about Chad are his depth of knowledge, responsiveness, honesty and the great service he provides. I have referred countless friends and family of mine to work with him for no other reason than I know that he will treat them well and equip them for the best possible outcome. Chad will add tremendous value to any real estate transaction that you have and I am grateful to have him as a resource.”