Can You Use Your IRA to Qualify for a Mortgage?
Qualify for a mortgage:
Mortgage lenders qualify borrowers for a mortgage based on their credit scores, debt-to-income ratio, and assets. As a result, retired borrowers are facing difficulties when trying to get a loan due to their decrease in income.
Qualifying for a Mortgage using your retirement account
Freddie Mac has performed a policy revision allowing seniors and others to use certain retirement account balances to supplement their incomes for underwriting purposes. You can do this without actually tapping those balances or drawing down cash. This works on purchase transactions
and no cash out refinances so long as the total loan to value does not exceed 70%. Therefore you must have 30% equity in the home after the completion of the new loan.
Why the Change in Rules?
According to one industry estimate, there is a large number of baby boomers heading into retirement status. There will be 8,000 people retiring each day for the next 18 years. As millions of American reach retirement, their work-a-day paychecks will end; they’ll now be dependent on social security, pensions, 401(k)s and IRAs.
Identifying this trend, Freddie Mac has adjusted loan regulations to ensure these retirees could borrow money for a loan if needed. These new guidelines allow senior with hundreds of thousands of dollars in a retirement account to use these assets in order to qualify for a loan.
Fannie Mae has a similar rule regarding retirement assets
How It Works to qualify for a mortgage
There is a formula that limits mortgage lenders to include just 70 percent of the assets. The lender may then subtract the funds needed for closing costs, down payment, and other loan expenses. Regardless of the loan term, the balance is split by 360 months. Then the monthly installment is added to your monthly income to help you qualify for a mortgage.
Documentation Requirements to qualify for a mortgage
Just like all loan qualifications, proper documentation is important. If using IRA distributions for your loan, you will have to verify the income with evidence of consistent payments. The required documents will vary depending on the source and frequency of the income. As well as on the methods of payment. (paper checks or direct deposit.)
You will need to provide payment documentation such as bank statements, check stubs, and other equivalent documentation. These documents have to show that you have received payments on a regular basis within the past 12 months.
In order to verify the types of income, you receive the mortgage lender will also require the following documents:
- Written verification from the organization paying the income
- Copy of the most recent award letter
- The past two years of personal tax returns
You must have sole account ownership, without penalties to your 401(k), IRA, or Keogh retirement fund. In addition, if using distributions, the income has to continue for at least three years. Furthermore, your account must also be fully vested.
Let’s assume you have $1 million in retirement assets. First, the lender essentially discounts the $1 million to take into account possible market swings. Therefore 70% of $1 million is $700,000. After subtracting $10,000 in closing costs, you have $690,000. You then divide that amount by 360. Because 360 months is the number of months in a standard loan term (30 years mortgage). Afterward, you will be given a credit of $1917 per month as income.
Down Payment Requirements to qualify for a mortgage
Lenders require a down payment of 30% if you’re using this type of mortgage loan to purchase a new home. This rule is to protect lenders against the increasing risk of borrowing money against retirement funds.
If you plan to use your retirement funds to refinance your current home loan, a similar stipulation is in place. In this case, they will require you have at least 30% equity in the property.
Lastly, if you have any questions or you just want to find out more you may contact Casey Moseman at 702-271-1274. She has a proven track record to take financing deals from quotes to closing. Casey has relationships with most mortgage lenders, knows the market and understand the needs of small to large owners. She can help you find the loan program that’s best for your individual circumstances and preferences.