When qualifying for a loan, it helps to use as much of your income as possible. If you’re retired, this creates challenges, as you likely receive limited incomes from multiple sources, such as a 401(k), IRA, or mutual fund account. You may also receive pensions or Social Security, among other payments.
Like many Americans, you might assume that a mortgage loan when retired is either extremely difficult or extremely limited. But as we’ll show you, there are many lending options available, and getting approved is probably easier than you think!
What is “Retirement Income?”
Retirement income can take a lot of different forms, but it is typically the money you earn after retiring from your job or career. It can include retirement savings and assets, Social Security allowances, and pensions. If you receive a regular distribution from a mutual fund or stock portfolio, that could also count as retirement income. IRA distribution is a common source of income during retirements, but this category of income can also include insurance payments, royalties, or inheritances.
Retirement income can be taxable and non-taxable, depending on the program, but whether or not you are paying taxes on the income, it is eligible for use during mortgage qualification.
And as you’ll see, there are many options for mortgages using retirement income to qualify…
What Types of Mortgages are Available When Using Retirement Income to Qualify
Conventional loans are simply loans that are not supported, purchased, or insured by the federal government in any way. These loans, because they are determined by the lender, do not have the across-the-board requirements that you’ll find from government-supported loans. This can be good or bad, as lenders essentially get to use their own discretion or policy to make a decision.
Mortgages Purchased by Fannie Mae
Fannie Mae is a government-backed company that purchases loans on the secondary market. They only purchase loans that meet their specific guidelines, but they work with the goal of creating available mortgage loans for more American buyers.
According to the guidelines from Fannie Mae, to qualify for a loan the lender will have to document consistent payments from the retirement account; this verification can be done with letters from the organization giving the income, copies of retirement award letters, or copies of signed federal income tax returns. IRS W-2 or 1099 forms can also be used, as can proof of current receipt.
Retirement income that comes through a distribution from a 401(k), IRA, or Keogh retirement account will need to be handled with special care by the lender. He or she will need to determine whether the income is expected to continue, and it will need to continue for another three years in order to be used for qualification. As the borrower, you will need to have unrestricted access to the account without financial penalty, and if the assets are in the form of stocks or bonds, 70% of the value will be used. This is because the value of stocks can fluctuate, so only a portion is used, which reduces risk to the lender.
Veterans and service members who qualify for VA benefits can also use retirement income to qualify for a loan. Even if you are still working but about to retire, you can use your future income for qualification. In most cases, the lender will need your official retirement date and the exact retirement income in writing to get you qualified. A signed statement should be enough for qualification in most cases, which could come from the commanding officer or a Department of Defense retirement income calculator. Depending on the specific income you will receive during retirement, you may need to bring cash reserves to qualify for the loan. This will depend on the size of the loan, your future income, and the length of time between retirement and the first income payment. Some lenders could even place a limit on the amount of days they’ll allow between retirement and the first payment.
To qualify for a VA loan using retirement income, you will likely need bank statements, award letters, or IRS forms 1099-R. You will probably need these for the past two years. Social Security and Social Security Disability Insurance is also possible for qualification when you are seeking a VA loan.
FHA loans, which are held by the lender but insured by the Federal Housing Administration, are available using retirement income. These loans are often great options for borrowers, as they have lenient credit and income requirements. However, they do have limits that conventional or jumbo loans may not.
To use your retirement income for an FHA loan, the income must be verified from the former employer. If this is not possible, you can also used Federal tax returns to verify the income. Like the Fannie Mae loans, if the income will stop within the next three years, you can’t use it for qualification.
For example, let’s say you have an IRA distribution worth $2,000 a month that will stop in two years and a 401(k) account worth $2,000 a month that will deliver payments for the next ten. In this case, you have a monthly income of $4,000, but only the 401(k) account can be used to qualify. This means you’ll have to qualify using an income of only $2,000 a month. (This is, of course, a simplified example.)
Jumbo loans are simply large loans that are beyond the amounts supported by any government institution or government-backed company like Fannie Mae and Freddie Mac. To qualify for a jumbo loan using retirement income, you will likely need a strong credit score, a large down payment, and substantial cash reserves. You’ll also likely need a large retirement income, as these loans will have larger monthly payments.
Explore Your Mortgage Options Using Retirement Income
Want more information on using retirement income for loan qualification? Contact our staff and we’ll make sure you have the best chance at mortgage approval. Let us put our knowledge, experience, and dedication to common-sense underwriting to work for you!