Lenders like retirement income because it arrives on a schedule. A pension that pays for life, Social Security on your own work record and a planned monthly IRA withdrawal all count, and the CFPB points out that the Equal Credit Opportunity Act bars a lender from discounting income because it comes from a pension or retirement benefit.
What each kind of retirement income needs
| Income | Proof | Continuance |
|---|---|---|
| Pension | Award letter or benefit statement, plus a bank statement | At least 3 years, which a lifetime pension meets |
| Social Security retirement | Social Security award letter | Benefits on your own record are treated as continuing |
| Annuity | Statement from the insurance company | At least 3 years from the application |
| IRA or 401(k) distributions | Most recent account statement, plus proof you're receiving the payments | The balance has to cover at least 3 years of withdrawals |
Fannie Mae counts a fixed distribution with no minimum history, while a distribution that varies needs a 12-month history, and the lender averages the last 12 months. You can add up your 401(k), IRA and Keogh balances to pass the three-year test, as long as you can withdraw from them without a penalty.
Savings you aren't drawing from yet
Fannie Mae can turn an untouched 401(k), IRA, SEP or Keogh account into monthly income, a method lenders often call asset depletion. The lender takes the balance, subtracts any early withdrawal penalty and the money you'll use for the down payment, closing costs and reserves, and divides what's left by the number of months in the loan. On a 30-year loan, that's 360.
You need the right to withdraw the full balance, and the method applies to an account with no distribution set up yet (or one paying too little to qualify). The loan can go up to 70% of the home's value, or 80% when the owner of the account is 62 or older at closing.
A worked example
Frank is 67. He receives a $1,400 monthly pension and $2,000 a month in Social Security, and he has $210,000 in an IRA he hasn't touched. After selling his last house, he's putting 20% down on a $320,000 single-family home. His only debt is a $150 card payment. Here's a Conventional loan at a 5.75% rate, with property tax at 0.95% of the price a year (the high end of the 0.74% to 0.95% range QualRate uses for Florida) and insurance of $283 a month:
| IRA counted by the asset method | $1,000 monthly IRA distribution set up first | |
|---|---|---|
| IRA as monthly income | $583.33 ($210,000 ÷ 360) | $1,000.00 |
| Qualifying income | $3,983.33 | $4,400.00 |
| Highest price at 20% down | $285,000 | $323,000 |
The $1,000 distribution passes the three-year test easily: 36 months is $36,000, and the account holds $210,000. At $320,000, Frank's $256,000 loan has a payment of $1,493.95 in principal and interest, $253.33 in property tax and $283.00 in insurance, $2,030.28 in all, with no mortgage insurance at 80% of the value. With his card payment, that's 49.6% of $4,400, inside Conventional's 50% limit. Under the asset method, he'd top out at $285,000.
Social Security is counted at face value here. The part of it that isn't taxed can be grossed up 25% on Conventional, which would raise both columns.
How each program treats retirement income
- FHA: Counts pensions, Social Security, annuities and IRA or 401(k) distributions you're receiving, grosses up untaxed income 15%, and allows 46.9% housing and 56.9% total with 3.5% down.
- Conventional: Adds the asset method for untouched accounts and a 25% gross-up, with a total ratio up to 50% from a 620 score.
- VA: Federal rules say income can't be discounted because it comes from an annuity or pension, and residual income decides the approval.
- USDA: When a borrower is 62 or older, USDA subtracts $400 from household income for its eligibility limit, plus medical costs above 3% of annual income, with 29% housing and 41% total ratios.
If your retirement income comes up short
- Start a regular distribution. As Frank's table shows, a set monthly withdrawal often counts for more than the asset method.
- Put more down from a home sale. A bigger down payment lowers the loan and the payment.
- Add an adult child as co-signer. Their income counts with yours on FHA and Conventional, and they don't have to live in the home.
- Pay off a card or car. Each $100 of monthly debt removed frees $100 for the house payment.
Enter your pension, Social Security and planned withdrawals in the QualRate calculator to see your price. AAA Capital Funding can compare the distribution and asset methods on your actual statements, so call 888-601-8344 before you set up any withdrawals.