If you’re of retirement age and have substantial retirement savings but don’t show enough monthly income to qualify for a conventional mortgage, a systematic distribution from a retirement account may provide the qualifying income you need. Conventional mortgage guidelines allow fixed distributions from eligible retirement accounts, such as a 401(k), IRA, or Keogh account, to be used as monthly qualifying income. A systematic distribution does not require any lengthy history of receipt before it can be used, and you can make changes or cancel it after your mortgage loan closes. This income can be used in conjunction with other sources of income to qualify, including w2 income, fixed income, self employment income, and all other acceptable income sources.  

How Does It Work?

The lender must document that sufficient eligible retirement assets are available to support the established distribution for at least three years (36 months). This means an eligible retirement account can potentially support a monthly distribution of up to 1/36 of the available account balance.

For example: 
$100,000 ÷ 36 months = $2,777 per month
$1,000,000 ÷ 36 months = $27,777 per month

A retired borrower with $100,000 in an IRA or eligible retirement assets could potentially establish a systematic distribution of approximately $2,777 per month and use that amount as qualifying income, subject to the applicable underwriting and documentation requirements. With $1M in retirement accounts, they can use up to $27,777 to qualify. This can make a tremendous difference for a retired borrower who has substantial assets but can not verify enough traditional monthly income to qualify for the mortgage they want.

What Documentation Is Needed?

The process is straightforward, and should be easy to set up. A monthly systematic distribution is established with the retirement-account provider. The lender will need documentation or a letter confirming the amount and frequency of the distribution, along with the 1st check as evidence that the distribution has begun and verification the required funds are available to support it for at least three years. In most cases, this can be documented with confirmation from the retirement-account provider and evidence of the initial distribution, subject to the lender’s specific documentation requirements. Fannie Mae guidelines require no minimum established history for a fixed retirement distribution. In other words, you don’t necessarily need to establish the distribution months or years before applying for the mortgage.

What Happens After the Mortgage Closes?

The systematic distribution is used to establish qualifying income for purposes of obtaining the mortgage. After the loan has closed, the mortgage does not generally require the borrower to maintain that particular distribution schedule for any length of time. The retirement account remains the borrower’s account. After closing, the borrower can generally work with their financial or tax advisor and retirement-account provider to determine how they want to manage future distributions, subject to the rules governing their retirement plan. In other words, qualifying for the mortgage using a systematic retirement distribution does not mean you commit to taking that same monthly distribution for any length of time beyond closing.

A Powerful Mortgage Strategy for Retirees

For retirees and those of retirement age, with substantial qualified retirement assets, systematic distributions can be an extremely effective way to establish the monthly income needed to qualify for a conventional mortgage. You do not have to be retired, you just need to be of retirement age (usually 59.5 years old) and have access to the funds without any early withdrawal penalties. At JZ Mortgage, we understand how to properly structure and document retirement income for mortgage qualification. If you’re retired and considering buying or refinancing a home in Florida, contact us before establishing the distribution. We can calculate the income needed for your mortgage qualification and help determine how to properly set up and document the retirement distribution.

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This information is for educational purposes only and is not tax, legal, or investment advice. Mortgage and retirement-account guidelines are subject to change. Individual lenders and retirement plans may have additional requirements. All loans are subject to applicable underwriting and lender guidelines. Consult your financial or tax advisor regarding retirement-account distributions and their potential tax consequences.