August 18, 2016
A reader got in touch with us recently in the comments section to ask a question about 401K retirement income as it relates to FHA loan approval. “Does the fact that you have a 401k count as income or does it benefit your chances in any way of getting a home loan?”
FHA loan rules in HUD 4000.1 cover a variety of income sources including 401k income. Individual retirement account income from a 401K may be used to qualify a borrower for an FHA mortgage provided the income meets FHA and lender standards. HUD 4000.1 instructs the lender on how to review 401K income, beginning with a definition of it:
“Individual Retirement Account (IRA)/401(k) Income refers to income received from an IRA.”
With the definition spelled out, the FHA loan rule book goes on to instruct the lender:
“The Mortgagee must verify and document the Borrowers receipt of recurring IRA/401(k) distribution Income and that it is reasonably likely to continue for three years. The Mortgagee must obtain the most recent IRA/401(k) statement and any one of the following documents:
-federal tax returns; or
-the most recent bank statement evidencing receipt of income.”
Documenting the income is a very important part of the verification process, so borrowers should expect to have to supply supporting evidence of this type of income with tax records, bank statements, and any other paperwork required by the lender. Furthermore:
“For Borrowers with IRA/401(k) Income that has been and will be consistently received, the Mortgagee must use the current amount of IRA Income received to calculate Effective Income.”
Not all 401K plans are alike, so there may be cases where a borrower has fluctuating payments from their retirement accounts. In such cases, FHA loan rules in HUD 4000.1 tell the lender, “For Borrowers with fluctuating IRA/401(k) Income, the Mortgagee must use the average of the IRA/401(k) Income received over the previous two years to calculate Effective Income. If IRA/401(k) Income has been received for less than two years, the Mortgagee must use the average over the time of receipt.”
As mentioned previously, lender standards may also apply and the laws of your state may also factor in, which is why it’s a good idea to consult with a loan officer about your specific circumstances before you fill out a loan application.
401K income is viewed separately in the FHA loan rule book from pensions and other types of income. Borrowers should expect to provide documentation for any and all income sources including pensions, retirement savings accounts, investments, etc.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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