Using assets to quality for a home loan is a common strategy for retirees. If you are at the retirement stage of your life, and want to purchase a new home (and need a loan to do so), you probably don’t have the typical income that is used to qualify most mortgages. Instead, you can use retirement accounts like IRAs, and 401(k)s to qualify.
But what if you are not retired? Can you still use these assets? If you want to qualify for a larger loan, using assets can be a helpful approach. It can add hundreds of dollars to your qualifying income, which means a larger, more luxurious home for you and your family.
If you are not retired, qualifying for a larger loan using assets is relatively simple.
Using Your Assets to Qualify for a Larger Loan
Eligibility Requirements
First of all, we should establish the ground-level requirements for using this loan option. After all, if you don’t meet the basic requirements, there’s really no point in taking the time and energy to understand the qualification formula. These requirements are fairly straightforward, and likely will not disqualify most potential borrowers.
Credit Score: 620 or Better
The primary requirement is a FICO score of at least 620. While this is not a particularly low score (these are not, after all, low-credit loans), neither is it a high score. According to Experian, one of the major credit bureaus, a score ranging from 580 to 669 is considered a “fair” credit score. Their information also states that 67% of Americans have scores that are “good” or better (670 or higher). So it seems fair that most borrowers won’t be eliminated based on credit.
Purchase Loans Only
This loan option can only be used to make a purchase. This means that you can’t use it to refinance your loan, take out a cash-out refi, or perform any other type of mortgage-based borrowing except to purchase a property.
Primary Homes and Secondary Homes Only (No Investment Properties)
Essentially, this is for personal properties only. You can use it to but a primary home or a secondary home, but assets cannot be used (at least for this mortgage product) if you are buying an investment.
Unrestricted Access Required
You also need to have unrestricted access to the account. If there are any barriers between you and the assets, such penalties for withdrawal, the asset can’t be used.
All Owners Must Be On Loan
If you are the sole owner of the account, this is no concern. However, if there are multiple owners of the retirement account, including a spouse, all owners must be listed as borrowers on the loan.
Using Assets as Monthly Income: The Formula
If you meet all of the above requirements, we can use your retirement assets as income on your loan. But there’s a little problem. Retirement accounts consist or a sum of cash, but mortgages are qualified using a borrower’s monthly income. How can a bulk sum of cash, such as half a million dollars in a retirement account, be stated as a monthly income? The process is actually fairly simple.
Step One: Asset Sum
The first step is to simply add all of your eligible retirement accounts. Add up the sum total of your IRA, 401K, Keough, and SEP accounts, as well as any other eligible assets, and you have the number that will be used as a foundation for the calculation.
Step Two: Subtract 10% for Early Withdrawal Penalty
Next, you will have to subtract 10% because of early withdrawal. If you are over 59.5 years of age, you don’t have to calculate this reduction, but if you are below that number (regardless of whether or not you are retired), 10% must be taken out from the asset sum.
Step Three: Subtract 30% for Market Volatility
The next step is to reduce this number by 30%. (Remember, you are taking 30% from the new number, not the original asset sum.) Retirement accounts are usually invested in the stock market and bonds, and these investment types, while generally stabile and growing, can be volatile, and there is always the chance that they could decline in value. To compensate for this potential reduction, the new number is reduced by 30%.
Step Four: Divide by the Number of Months
Now you simply take the number and divide by however many months are on the loan. For a 30-year mortgage, this would mean 360 months. For a 15 year mortgage, it would be divided by 180.
Whatever number comes out after your calculation can now be added to your qualifying income. This can significantly boost the amount of qualifying monthly income, and could help you qualify for a larger home or a property in a more high-cost area.
Qualify for Larger Loan Using Assets: An Example
To help you fully understand the process, let’s look at a simplified example. Suppose you have $400,000 in an IRA, you are younger than 59.5 years of age, and are taking out a 30-year loan. Here is how the math would play out:
IRA (stocks & bonds) |
$400,000 |
Penalty for early distribution (10%) |
(-) $40,000 |
Eligible Assets |
(=) $360,000 |
Discount for stock & bond volatility (30%) |
(-) $108,000 |
Net Eligible Assets |
(=) $252,000 |
Income ($252,000/360mos. or applicable term) |
$700/Month |
In the example above, we started with $400,000 in an IRA account. Because the person is below 59.5 years old, we have to subtract 10%, or $40,000, from the number, leaving us with $360,000. We will then subtract 30% ($108,000) from the $360,000, leaving us with $252,000. The borrower wants to use a 30-year mortgage, which means 360 monthly payments, so we would divide $252,000 by 360, leaving us with $700. We can then add $700 to someone’s qualifying income, significantly increasing the amount of borrowing power.
Use Your Assets to Purchase Your Dream Home
You can qualify for a larger loan using assets, including retirement accounts. Contact our experienced team today and let us use your 401(k), IRA, and other accounts to enhance your borrowing potential and help you purchase a world-class home!