We had an interesting and educational experience helping a client buy a new home recently. The client is over age 50 and has assets in the seven figures, but not a lot of ordinary income. They didn’t want to pay cash for their new home which meant they had to take out a mortgage. Even with sizable liquid assets and an ability to make a large down payment, the mortgage qualification process proved more difficult than anticipated.
Involving us in the home buying process
First, and we say this to our clients all the time, we can only help you if we know there are things you need help with. So we were very happy when this client brought us in the loop on her home buying plans. Right away, we began corresponding directly with the client’s mortgage lender. We reviewed the various rate options that were presented to her and advised on which terms she should choose based on her financial situation.
There was just one problem, the underwriter was having trouble getting final approval and needed to see higher income. That’s right, even though this client had more than $1 million in brokerage assets (not including investment properties), they were still having trouble getting approved for their mortgage. The underwriter had a simple solution: let’s just increase the down payment. Well, that didn’t really work for the client… she wanted to keep greater cash on hand.
So we proposed a different solution: what if we set up a recurring distribution from the client’s IRA account in order to show greater income? Bingo! The underwriter said that this would work.
Using an IRA account to show income
Fannie Mae and Freddie Mac both accept IRA income for mortgage qualification. And most all underwriters will follow Fannie/Freddie guidelines in order to approve a mortgage application. Here are two key guidelines when using an IRA account to show income for purposes of qualifying for a mortgage:
- The assets in the IRA must be able to support three years worth of the stated income amount (example: if taking $1,000 per month from the IRA then the assets must be able to support that for three years)
- The account owner must be able to access the funds without restriction or penalty (so must be legal retirement age of 59 1/2 for an IRA, no legal actions pending like divorce, etc)
So in our client’s case, we spoke directly with the underwriter and learned that the client needed to show an additional $1,500 per month in income. So, we set up a recurring monthly distribution in that amount from the IRA account. We provided the underwriter with a recent account statement verifying that her IRA could in fact support three years worth of such distributions. Boom — Mortgage approved!
After the client officially closed on the mortgage, she didn’t want to keep taking money out of the IRA account so we cancelled the rest of the distributions. All in all, only $1,500 came out of the account. Because she has officially closed on her house, the lender is not checking to see if these distributions remain in place. This is an important point because it means that while the distribution was only temporary, the lender treats it as permanent for the purposes of approving the loan. Of course, you should not advertise this fact to your lender when you are going about the process 🙂
Implications for retirees
The ability to use IRA accounts to show income for the purposes of qualifying for a mortgage has huge implications for retirees or near retirees. This means that you can still qualify for a mortgage even with very low or no regular income. This is especially helpful for retirees in the 60-65 age range who are not yet drawing social security and who don’t want to pay cash for a home.
So whether you are thinking of downsizing, moving to be closer to grandchildren or adult children, or buying a vacation home, remember that your IRA account(s) provides great flexibility in your home buying process. Be sure to keep us apprised of your home buying plans so we can assist if you are one of the many age 60+ people who are buying a home in 2025 or 2026.
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