If you or someone you know is retired or retiring soon and planning on buying a “forever” home, there are some things to know as it relates to qualifying income. For most, retiring means living on less and essentially downsizing financially. The regular 1st and 15th paycheck is in the rear view mirror and now it’s time for other income to come into play. For most, monthly income comes from social security, interest and dividends and retirement accounts.
Social security is a given. You can apply for social security up to three months before you turn 62. However, if you wait until 65 your monthly social security income will be higher. There are arguments on both sides as when to take social security, so it’s important that you have a discussion with your spouse and financial planner. And yes, social security income is considered taxable income.
Dividend income and interest come from savings and retirement accounts. There’s a special section on the loan application labeled “Interest and Dividend.” As it relates to interest income, there does need to be a history of receiving it. Most guidelines ask there be at least a two year history of receiving it.
Borrowers will need to provide the last two years of federal income tax returns showing the amount of interest income received during that time frame. Lenders will average those two years together and then divide by 24 (months) to arrive at a qualifying amount. At the same time, lenders must also make a general determination that the interest income will continue into the future. It’s a judgment call but lenders typically want to be assured the income will continue for at least three years. Borrowers may also be asked to provide copies of statements from these accounts showing the account balance(s) issuing interest as well as the terms of the amounts being paid. It’s important to show that the accounts providing interest payments are sizable enough to make these payments without directly withdrawing from the account balance. This would reduce monthly interest income.
Dividend payments are a bit trickier because they may not come on a regular enough basis where borrowers can use the dividend payments to service debt and monthly expenses. If a dividend payment comes once per year, it won’t be available year-round for debt service. For dividend payments that come quarterly, it can be assumed the funds will be available to help pay the bills in retirement. As with any other type of income, there needs to be at least a two-year history of receiving it and the lender makes an internal determination the income will continue into the future for at least three years.
A 401(k) account will also pay dividends. Borrowers should be prepared to fully document the terms and payouts of a 401(k) account, when the borrowers expect to withdraw funds from the retirement account and if there are enough funds available to help service any type of monthly debt.
In essence, any income outside of social security needs to have a history prove the likelihood of continuance well into the future. Even though someone is receiving some type of retirement income, there’s the possibility it can’t be counted toward qualifying income. For this, you’ll need to speak directly with an experienced loan officer.
