Using Retirement Accounts for “Income”

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Prior posts have focused on how to use brokerage account assets to qualify for a mortgage.  Now let’s review using retirement account assets for “income” purposes.  The focus here is retirement accounts recognized by the IRS, such as IRA, Roth IRA, 401K, etc. accounts.

If the borrower can obtain distributions from the qualified retirement account without incurring an IRS penalty, then distributions from the retirement account can be considered as stable qualifying income if the income is expected to continue for at least 3 years.  Assuming that the borrower, “Don,” from my last two posts had his $500,000 in a qualified retirement account, here’s how we would calculate his “income” for a mortgage application.

Now if Don’s retirement portfolio includes stocks, bonds, and / or mutual funds, we start by multiplying the account balance times 70% to adjust for market volatility.  That gets us to $350,000 in usable asset value.  Don has been receiving $4,000 monthly distributions and wants to continue that, so we divide his $350,000 balance by his $4,000 distributions.  The result is 87.5.  So Don can continue these distributions for over 87 months.  The required minimum is 36 months (3 years).  Therefore Don can use his monthly distributions as “income” for his mortgage application.  Let’s go find that house he wants!

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Now let’s assume that Don only has $190,000 in his 401K.  The result after adjusting for market volatility is $133,000.  Assuming Don must pay $12,000 in cash at closing (down payment, closing costs, etc.), his available retirement account balance after closing on his home purchase would be $121,000.  That would allow for only 30 months of distributions at $4,000.  So we would have to adjust Don’s income for mortgage purposes down to about $3,360 and then look for a house he could afford with that monthly income.

There are other guidelines that also apply.  It gets complicated, but that’s why experienced mortgage lenders can really help.  If you know a retiree who is thinking about buying a home in Georgia, recommend that they talk to an experienced lender before planning a home purchase price.  Have them call or email me at Dunwoody Mortgage Service.  We will discuss their asset allocations and determine how much of an “income” they can use on their loan application.  I can help them structure the deal right the first time, making their loan experience as smooth as possible.

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