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How Lenders View Retirement Income

Written By: David Reed
Wednesday, September 18, 2019

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 itrsquo;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. Therersquo;s a special section on the loan application labeled ldquo;Interest and Dividend.rdquo; As 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. Itrsquo;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 balances issuing interest as well as the terms of the amounts being paid. Itrsquo;s important to show that the accounts providingnbsp;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 wonrsquo;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 401k account will also pay dividends. Borrowers should be prepared to fully document the terms and payouts of a 401k 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, therersquo;s the possibility it canrsquo;t be counted toward qualifying income. For this, yoursquo;ll need to speak directly with an experienced loan officer.





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