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Many borrowers want to know if the income coming from 401K accounts can be used as part of the debt to income calculation. What does the FHA loan rule book say about using a 401K to qualify? Are there cases where 401K income can be used in eligibility calculations?

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Can I Use 401K Income to Qualify for an FHA Mortgage?

Can I Use 401K Income to Qualify for an FHA Mortgage?
September 26, 2016 - There are many types of income a lender can review to determine whether an applicant is financially qualified to be approved for an FHA mortgage. Many borrowers want to know if the income coming from 401K accounts can be used as part of the debt-to-income calculation. What does the FHA loan rule book say about using a 401K to qualify? FHA loan rules in HUD 4000.1 cover a variety of income sources up to and including money from a 401k.

Individual retirement account income from a 401K may be used to qualify a borrower for an FHA mortgage IF the income meets FHA and lender standards. HUD 4000.1 instructs the lender on this issue, beginning with a definition of “401k accounts” to avoid confusion with other forms of income:

“Individual Retirement Account (IRA)/401(k) Income refers to income received from an IRA.” That seems fairly simple enough, but the definition is required in order to make sure the 401k is reviewed specifically as such and not lumped into another category.

The FHA loan rule book in this section instructs the lender:

“The Mortgagee must 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 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.”

As with many other types of income verification, we see that FHA loan rules have a time requirement on the income. And documenting 401k income is is a key part of the lender’s verification process, so if you need to include 401k payments, you should expect to supply supporting paperwork such as tax records, bank statements, and any other paperwork required by the lender.

HUD 4000.1 adds, “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.”

In some cases, a borrower may have “fluctuating payments” from the retirement accounts. For these situations, HUD 4000.1 tells 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.”

Lender standards and state law may also apply for all of the above, so discuss your circumstances with a loan officer to see if there are additional requirements.

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