Getting a Mortgage on Retirement Income: Buy Before or After Your Retirement Date?

Lenders can count retirement income such as a pension, an annuity or regular distributions from a retirement account, but they qualify you on the income you'll have, not the paycheck you're leaving. Under Fannie Mae's guidelines, if the lender learns your income is dropping, for example through a pending retirement, it must use the lower amount, so the real question is which income gets you the home and the payment you want.

I'm Dennis Mark Interdonato with The Dennis Mark Group at Keller Williams Realty Ocean Living. A change from a paycheck to retirement income is a timing decision as much as a housing one. If you own a home in Monmouth or Ocean County and your retirement date is on the calendar, the question is the same: sell and buy now, or wait until that date? Here's how the lending side works, so you and your lender can run the numbers both ways.

What retirement income can a lender count?

Fannie Mae's Selling Guide, which many lenders follow for conventional loans, lets lenders count annuity, pension and retirement income. Section B3-3.4-03 says the lender must verify the amount you're currently receiving using at least one of these:

• A statement from the organization paying the income
• A retirement award letter or benefit statement
• Bank statements
• A signed federal tax return, a W-2 or a 1099

Other loan programs have their own rules, so ask your lender which ones apply to you.

How long does the income have to last?

Fannie Mae's general rule, in section B3-3.1-01, is that income should be stable and predictable. When income has a set end date or depends on drawing down an asset, "the lender must document that the income is expected to continue for at least three years from the application date."

For distributions from a retirement account, section B3-3.4-03 applies the same three-year test, and balances in 401(k), IRA or Keogh accounts may be combined to meet it if you have unrestricted access to them without a penalty. If an asset account is the only or main source of the income you're qualifying with, the lender also has to consider whether you can keep paying the loan after the account runs down or the income stops.

Does your retirement date change what you qualify for?

It can. Section B3-3.1-01 says that if the lender learns you're moving to a lower pay structure, for example through a pending retirement, "the lender must use the lower income amount in qualifying," and confirm that the lower amount is stable and predictable. Answer every question on your application accurately. The point of knowing this rule is planning, not timing tricks.

So the useful exercise is to have your lender run two scenarios side by side:

1. Buy on your current income, with the lender applying its rules to any income change it knows about.
2. Buy on your retirement income, documented with award letters and account statements.

Then compare what each one buys, what each payment looks like, and how comfortable each payment is on the income you'll be living on. If your job is changing rather than ending, here's what a lender looks at when you change jobs.

How does selling your current home fit in?

For a lot of people, the home they own is the biggest piece of the plan. Equity from the sale can lower the loan amount on the next home, and sometimes means a smaller payment or no mortgage at all. Under IRS Publication 523, you can generally exclude up to $250,000 of gain on the sale of your main home, or up to $500,000 on some joint returns, if you owned and lived in it for at least 24 months of the five years before the sale. Your tax professional confirms how it applies to you.

Start with what your home is worth today, and get a written estimate of what it costs to sell. Then your lender is working with real numbers, not a guess. If you're selling and buying at once, here's how back-to-back closings work in New Jersey.

What should the next home cost to run?

The mortgage is only part of it. The Consumer Financial Protection Bureau reminds buyers that when you own a home, "you pay for repairs, along with any property taxes, insurance, and homeowners association dues that apply." In New Jersey, each town sets its own property tax rate, so compare the tax bills on the homes you're considering, not only the prices.

Upkeep matters too. I'm a former New Jersey home builder and residential remodeler, so on the next house I'm reading the roof, the mechanicals and the renovation work, and telling you what's coming in the next few years. Here's a builder's checklist for a low-maintenance home.

Who does what in the plan?

• Your lender decides what income counts and what you qualify for, in both scenarios.
• Your tax professional looks at the sale of your current home and any account withdrawals.
• Your attorney reviews the contracts.
• I handle the sale and the search, and time the two so you move once.

How I plan around a change like this is on my life events page, and the Life Events Guide lays out the order of operations.

Frequently Asked Questions

Can you get a mortgage on retirement income?

Yes. Fannie Mae's guidelines let lenders count pension, annuity and retirement income, verified with documents such as award letters, benefit statements, bank statements, tax returns or 1099s.

Do lenders count 401(k) or IRA distributions as income?

They can. Under Fannie Mae's guidelines, the lender must document that the distributions can continue for at least three years from the application date, and account balances may be combined if you can access them without a penalty.

Is it better to buy a house before or after your retirement date?

It depends on your numbers. If the lender learns your income is about to drop, Fannie Mae's guidelines say it must qualify you on the lower amount, so have your lender run both scenarios and compare the payments.

What documents prove retirement income for a mortgage?

Fannie Mae lists a statement from the payer, a retirement award letter or benefit statement, bank statements, a signed federal tax return, a W-2 or a 1099. Your lender tells you which it needs.

This is general information, not legal, tax or lending advice. Loan programs differ, and your lender decides what income counts.

About the author

Dennis Mark Interdonato is a REALTOR® and Master CDRE® who leads The Dennis Mark Group at Keller Williams Realty Ocean Living in Point Pleasant, NJ, helping buyers and sellers throughout New Jersey make their next move, with Monmouth and Ocean County as home base. Read more about Dennis Mark.

Keep reading

• Buying a home while planning for retirement in New Jersey
• Bigger or smaller: what the next home needs
• Have a question this didn't answer? Send it to Dennis Mark and it may become the next article.