It used to be hard for retired borrowers to buy a home or refinance a mortgage because lenders insisted on seeing their current income – the kind that comes from having a job.
Recently, Freddie Mac told lenders that it’s OK to use retirement funds to qualify borrowers for a home loan. When your loan is guaranteed by Freddie Mac, you can now use retirement assets to qualify for a home loan such as:
- Individual Retirement Accounts
- 401(k)s
- Lump-sum retirement account distributions
There are two caveats:
- Your IRA and 401(k) must be in a fully-vested retirement account recognized by the Internal Revenue Service.
- You have to be able to access the assets without paying a penalty and you can’t be using them as income.
When you opt to use assets to qualify for a home loan your lender, here’s how it will work:
1. The lender will total your retirement assets and multiply the total by 70 percent
Let’s suppose you have $500,000 in retirement assets — .70 x $500,000 = $350,000
2. The lender will subtract money you need to complete the transaction (for example for a down payment or closing costs)
Let’s suppose you need $50,000 for a down payment and closing costs — $350,000 – $50,000 = $300,000.
3. Finally, the lender divides the amount by 360 months — $300,000/360 = $833.33 month.
So in this example, you could use $833.33 to qualify for your mortgage.
Remember that you can always use income from other sources to help qualify including income from dividends, interest payments, trust distributions and Social Security payments.
