If you are retired and need a new home, approval for a mortgage can be difficult. You no longer have a regular income from work, and the income you do receive comes from a wide variety of sources.
To get approved for a mortgage, you need to use all your assets, including IRA distributions.
Note: Using Distributions, Not Early Withdrawal
It’s important to note here that we are not discussing an early withdrawal from an IRA account or any other form of retirement account. This is a different subject; in this article what we are talking about how to use money that you currently receive from a retirement as verifiable income for your home loan.
The distribution from an IRA is a regular withdrawal of cash from the account that is taken out to help pay for living expenses, bills, and other regular costs. Essentially, it is money that is scheduled to be taken out on a regular basis and sent through a check or transfer to the account holder.
Why Use IRA Distribution for Your Income?
Because it can increase your chances of approval! Think about it: as a retiree, you likely have a limited income, at least limited compared to what you may have earned in the past. If you decide to move and need a mortgage to fund a new-home purchase, you’ll want to bring as much income as you can to the table. For example, if you only use a pension worth $2,000 monthly as your official income during the application, you are limited to that amount. But what if you also have an IRA distribution that sends checks for $1,000 a month. If you use both, you can get qualified as having an income of $3,000, which can obviously increase your chances of approval.
Clearly it’s in your best interest to use as much of your income as possible, and this should always include IRA distributions that you receive.
5 Tips for Using Your IRA Distribution to Get a New Mortgage
So how can you use your IRA distribution to increase your chances of approval? It all hinges on bringing the right documents to the right lender.
1. Provide Proof that You Have Received the Money for a Year
One of the first requirements that you’ll likely need to complete is documentation on past IRA distribution payments. If you have not received the payments for 12 months, it won’t be eligible for use during the mortgage application. In this case, you may need to wait until you have received the payments for a year or you’ll have to proceed without the IRA distribution as part of your income. If you have received payments for a year, bring documents demonstrating the payments to your lending agent. These documents can be acquired through your lender if you don’t have them on hand.
2. Provide Proof That You Currently Receive The Money
Basically, you’ll simply need to show that you are still receiving the income. If you have a payment documents from the past month, that should be enough to verify that you are currently receiving the money.
3. Provide Evidence That The Payments Will Continue
The next step is to provide evidence that the payments will continue for the foreseeable future. In fact, you’ll need to show that the payments will continue for at least three years; if they will stop before three years, you will not be able to use this income as part of your application process.
4. Provide One of Three Documents
In addition to the documents we discussed above, you’ll also need to have one or more of the following documents:
Written Verification from the Organization
This will basically be an official statement from the organization that controls your IRA account. The document will need to highlight as many details as possible related to your IRA distribution, but should especially include the amount that is paid as well as the frequency.
Copy of Recent Award Letter
An award letter is provided by the source of the account and, like the previous document, highlights details related to the account, including payments. Keep all of your award letters to make sure you have the right documents in place when you need them.
Two Years of Personal Tax Returns
If you can’t produce any of the above documents, you may be able to complete the application with two years of tax returns. The tax returns should, of course, highlight how much you have received from the IRA distribution.
5. Work with an Experienced Lending Agent
Finally, the best tip we can give you is to work with an experienced lender who understands how to work with IRA distribution payments in a mortgage application. By working with someone who understands the details, you increase your chances of approval for an affordable loan.
Alternatives to Using IRA Distribution
If you are a retiree, IRA distribution is not the only option available for increasing your applicable income. Retirement account assets can actually be used even if you are not yet receiving regular payments. Essentially, you can take advantage of assets like retirement accounts to increase your borrowing power.
Under rules from Freddie Mac, you can actually use assets in IRAs and 401(k)s to increase your borrowing potential. If the money is available but not subject to an early-withdrawal penalty, it can be use for your income.
Basically, the lender considers 70% of the assets, minus $10,000, then divided by 360 months. This is the total that can be added to your income for the purposes of being approved for a loan.
So if you have $1 million in assets, the lender will take $700,000, then subtract $10,000 for fees, leaving $690,000. This number is divided by 360, which equals roughly $1,917. This amount can then be added to your income.
Use IRA Distributions for Your Next Loan
If you want to learn more about using IRA distribution income for your home loan approval, contact the team at San Diego Purchase Loans today. We’ll help you get the right loan for your specific needs, no matter what phase of life you’re in! Let us put our common-sense approach to lending to work for you!
“Chad and his team are exactly who you want handling the financing of your home. Whether it be a new purchase or refinance, he and his team are one of the most professional, responsive group of people I’ve worked with. Buying a home can be very stressful and Chad and his team took all of the necessary steps to make the process as painless and as quick as possible. They are extremely knowledgeable, organized and have great follow through. You won’t ever be left wondering what the next steps are. I highly recommend him and will use him in all of our real estate transactions moving forward.”
“Chad and his group made the mortgage approval process smooth and understandable. Multiple updates and explanations during the process kept me informed of progress. Chad also provided great advice on other home services, in particular an insurance company that saved me thousands of dollars a year on home and auto insurance.”
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I really enjoyed working with Chad Baker and the rest of the team. This was our first time buying a home in California and we started with unnecessary assumptions based on our previous experience as home-owners in a different state. Chad and his team were available throughout the whole process, explaining the state differences, answering all our phone calls and emails quickly and directly, and providing detailed weekly status reports so that all parties including agents knew exactly where we were in the process. Chad was very experienced and provided customized loan products for us to consider, which definitely facilitated our transaction. I recommend the Chad Baker team! ”