In this article we explain how to use your retirement account to qualify for a mortgage. Please note this is a different topic — with different guidelines — than making a withdrawal from your account to pay for the down payment on a home.
There are two ways to use retirement account income to get approved for a mortgage. The first way is relatively straightforward: you take regular distributions from the account. If the distributions are relatively consistent and you can document that they are expected to continue for at least three years then the distributions are counted as income for your application. Please note that if the distributions are from assets such as stocks, bonds or mutual funds, lenders apply a 30% discount to the value of those assets to determine the remaining number of distributions.
Even if you are not taking distributions or the amount of the distributions is not sufficient to qualify for the mortgage you want, you still may be able to use your retirement account assets to get approved for the loan. For example, if you hold significant funds or investments in your account you may be able to use those as assets as income when you apply for the loan.
In this case you do not need to take distributions — in fact it is better if you do not — or sell the assets to include income from the account in your application. Instead, lenders attribute income to your retirement account investments according to a specific set of guidelines.
In short, your retirement account assets count as income even though you may not actually currently receive any income or distributions from your account. Although this seems counterintuitive, this approach is permitted because you could sell those assets in the future to pay your mortgage payment, if necessary.
There are several requirements you must satisfy if you want to use retirement account assets to qualify for a mortgage. Lenders also use a specific formula to determine the income attributable to your retirement investments. We explain these points below in detail.
Eligible Retirement Accounts Types
Only certain types of retirement accounts can be used to qualify for a mortgage. Eligible accounts include the following:
Lump sum retirement package
Lump sum severance package
The account must be held solely in your name and you must have unhindered access to the account even if you are required to pay a penalty or taxes to access the funds. If the account is held jointly with another person, then they must be a co-borrower on the mortgage.
Additionally, if you want to use a lump sum retirement or severance package, you are required to provide the lender the 1099-R tax form for the distribution and deposit the funds in a retirement account.
Eligible Asset Types
Only liquid investments are used to determine the income attributed to your retirement account when you apply for a mortgage. Examples of eligible assets include the following:
Money market funds
Illiquid assets such as stock options, unvested stock, real estate and other non-retirement related investments are excluded from the income calculation.
Formula for Calculating Retirement Account Income
After you have determined the amount of eligible retirement account assets you hold, the next step is to understand the monthly income that is associated with those assets. The higher your monthly income, the higher the mortgage amount you can afford.
Lenders use a formula that takes into account any penalty you are required to pay if you liquidate your account and also subtract the amount of funds you are using to pay for your down payment, closing costs and reserves, if applicable. If you are using other sources such as a checking, savings or brokerage account to pay those costs then they are not deducted.
A 30% discount is also applied to certain types of investments to account for fluctuations in asset values. Any cash or money market funds in the account are not discounted. The value of the assets after accounting for the adjustments outlined above is divided by the number of months in your mortgage term to determine the monthly income attributable to those assets.
If that explanation was a bit challenging to follow, the example below shows you how the income calculation works. This assumes that the applicant pays a 10% penalty for early withdrawals from their retirement account and uses $20,000 in retirement funds for their down payment. The example uses a 30 year mortgage.
Example: Monthly Retirement Account Income for a Mortgage
Type of Retirement Account: 401(k)
Type of Assets: mutual funds, bonds
Value of Assets: $350,000
(-) 10% Early Withdrawal Penalty: $35,000
(-) Funds used for Down Payment: $20,000
= Retirement Assets After Deductions: $295,000
(-) 30% Discount: $88,500
= Net Retirement Assets Used for Income Calculation: $206,500
(÷) 360 months (30 year loan)
= Monthly Income Attributable to Retirement Account: $575
In the example above, $575 in retirement income is added to any other monthly income received by the applicant including employment or investment income. It is important to reiterate that you are not required to sell any of your retirement assets to include this income in your application and qualify for the mortgage.
Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan you can afford including retirement income
We should also highlight that the monthly income associated with the retirement account is higher if you select a shorter loan term because you divide the net assets by fewer months. In the example above, if you choose a 15 year mortgage the monthly retirement income is $1,150 because you divide the assets by 180 months instead of 360 months.
Other Qualification Guidelines
There are other qualification guidelines that apply if you want to use retirement account assets to qualify for a mortgage.
Unless all of the borrowers on the loan are 62 years or older, the maximum loan-to-value (LTV) ratio is 70%, which is lower than for a standard loan. If all the borrowers are 62 or older, the maximum LTV ratio is 80%. The lower the LTV ratio, the lower the mortgage amount you are eligible for.
Additionally, you can only use retirement account assets as income to qualify for a purchase mortgage or rate and term refinance on your primary or second home — investment properties are not permitted. Cash-out refinances are not allowed.
To summarize, as long as you have the right type of account and assets, your retirement funds can help you get approved for a mortgage. Additionally, your assets can count as monthly income without you selling them or taking distributions from your account. Although this approach has some limitations, it may enable you to qualify for the loan you want.
We recommend that you contact multiple lenders in the table below to understand their qualification guidelines and compare loan terms. Using a retirement account when you apply for a mortgage requires extra steps and it is important to confirm that your lender knows how the process works. Comparing lenders also enables you to find the lowest mortgage rate and fees.
"B3-3.1-09, Other Sources of Income, Employment-Related Assets as Qualifying Income." Selling Guide: Fannie Mae Single Family. Fannie Mae, October 2 2019. Web.