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FHA home loans require the lender to verify income and employment. If you are an experienced house hunter or a first-time home buyer, you may have questions about this process where certain types of income are concerned.

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Using 401K Income for an FHA Home Loan

March 21, 2019 - FHA home loans require the lender to verify income and employment. If you are an experienced house hunter or a first-time home buyer, you may have questions about this process where certain types of income are concerned.

And believe it or not, there is a segment of people in the real estate buying market that fall into the first-time home buyer category AND receive retirement income.

It’s not unusual for someone with a lifetime of renting experience to choose home ownership later in life. But what do FHA home loan rule say about verifying 401K retirement funds for the purposes of loan approval?

HUD 4000.1 has specific requirements for verifying 401K retirement account income / individual retirement accounts or IRAs.

The lender is required to “verify and document the Borrower’s receipt of recurring IRA/401(k) distribution Income and that it is reasonably likely to continue for three years.” The “likely to continue” factor is key for approving any kind of income, but the lender requires documentation to verify this:

“The Mortgagee must obtain the most recent IRA/401(k) statement and any one of the following documents” which can include federal tax returns or “the most recent bank statement evidencing receipt of income.”

FHA loan rules recognize that some IRA / 401K income may fluctuate and takes this factor into account. For IRA income that is consistently paid, the current payment amount would be used. But when the payments do fluctuate, FHA loan rules have specific requirements of 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.”

Documentation of your 401K payments may include tax returns, bank deposit statements, or other paperwork.

State law, lender requirements, and other standards may apply so it is best to discuss this type of income with your lender to see what may apply in your transaction. FHA loan rules don’t override state law, and the lender’s additional standards where applicable will be factor.
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