When you retire, your regular income may disappear. At the very least, it’s reduced significantly. But your borrowing needs may remain. Despite not having a routine paycheck from employment, many retirees still need to borrow money for automotive purchases, home repairs, and even property purchases.
If you are looking to purchase a home, but you are retired and don’t have a typical income, there are still many options available that can help you get approved for a loan. If you are older than 59.5 years of age, using IRA as income is one of your best options. As you’ll see, this process is actually quite simple and can help you secure top-quality financing for your next home purchase.
To use this loan option, you’ll need to have taken an IRA distribution and meet a variety of other requirements, which are usually quite simple.
Using IRA as Income for Loans Once you Hit 59.5 Years of Age
Why Use IRA Income for a Loan?
The typical stereotype of a retiree assumes that they purchased a home years ago and, now that it’s paid off, can live in the home and simply relax with no payments to worry about. But real life rarely fits this assumption. Retirees often want to purchase a new property, either as a replacement for their primary home or as a second home.
They may need financing for these purchases, but they don’t have a regular income, which complicates the application. Retirees are often low-income, high-net-worth individuals. By this, we simply mean that they don’t have a regular income from work, but still have a high net worth, often a net worth of multiple millions of dollars.
IRA income can help you get approved. Essentially, instead of using regular income and other income sources, you use the totals in your IRA account.
Retirees, and even people who are still working, use IRAs to either get approval or to supplement their qualifying income, which increases their borrowing power.
The motivation for needing a loan is diverse and different for everyone. In many cases, people 60 years old or older are “empty nesters.” They no longer need the large house that was perfect for raising their families. A smaller, more manageable house is often a better option. But smaller doesn’t always mean cheaper. At this age, they may want to reward themselves for a lifetime of hard work and frugal saving; a luxurious home near a lake or beach may be a preferred option.
People over 59.5 years of age may also be ready to reward themselves with a second home, such as a vacation property or a small house closer their children and grandchildren. In this case, they won’t be selling their primary residence, so they won’t be able to apply the finances of a home sale to their new purchase. This means they will need to finances almost all of the purchase unless they decide to use personal savings.
How is the Income Calculated?
It may seem complicated to apply a lump sum of money (in this case your IRA) into a stated monthly income for the purposes of loan approval. But it’s really not. Through a specific process, lenders are able to take your IRA total and turn it into qualifying income.
Here’s how it works…
To use IRA as income, your lender will simply take the total in your account, calculate 70% of that number, subtract a small amount, and divide by however many months will be on the loan.
Here’s an example…
Suppose you have $3 million in your IRA account. This is the starting point for calculating your qualifying income, but it needs to be broken down into a monthly total. It also needs to reflect the market volatility of stocks and mutual funds, which is usually how IRAs are compiled.
So the first step, after determining how much you have, is to reduce the amount by 30%.
Step 1: Determine 70% of IRA Total
Once you have your total, you can use 70% of that number to move forward with IRA income. So if you have $3 million in an IRA account, you can move forward with $2,100,000.
Step 2: Reduce Total for Fees and Expenses
The next step is to compensate for fees and expenses that you will have to pay as you close the purchase. These can include lending fees, agent fees, and other important closing costs. Usually this is about $10,000, so we’ll stick with that for our example. This leaves us with $2,090,000.
Step 3: Divide by the Number of Months on the Future Loan
Now that we have a total number, we can divide by the number of months on the loan. If you are applying for a 15-year mortgage, the number would be divided by 180, as there are 180 monthly payments in a 15-year mortgage. If it’s a 30-year loan, the number is divided by 360.
In our example, we are looking at a 30-year mortgage, so we would take $2,090,000 and divide it by 360, leaving us with $5,805.55. This means we have a qualifying income of $5,805.55 that can be applied to the loan.
Of course, not everyone will have $3 million in their IRAs, but this example highlights the powerful potential of using your IRA as income.
Is it Best to Wait Until After 59.5?
In general, it’s best to wait until after you are 59.5 years old or older to use an IRA distribution. This is because early withdrawal can have significant tax penalties. These accounts are intended to encourage retirement saving, so the federal government has created incentives for leaving it alone until a certain age. Therefore, most people will want to wait until after their 60th birthday to draw from their retirement savings.
Dedicated to Helping You Get Approved for an Affordable Mortgage
If you want more information about using your IRA as income towards your next loan, give us a call right away. We are dedicated to common-sense mortgage underwriting, and we’ll do everything possible to help you get approved for an affordable loan no matter where you are in life!
From first-time homebuyers to retirees looking for their dream vacation property, we are here to help with all of your purchases.