Fannie Mae Guidelines on Using Retirement Income

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on September 07, 2023

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Overview of Fannie Mae Guidelines

Fannie Mae, formally known as the Federal National Mortgage Association, is a US Government-Sponsored Entity (GSE) tasked with providing liquidity, stability, and affordability to the secondary mortgage market.

Established during the Great Depression, Fannie Mae purchases mortgages from lenders, converts them into mortgage-backed securities, and sells them to investors, ensuring a constant influx of capital into the mortgage market and thereby facilitating more loans at affordable rates.

Fannie Mae also establishes lending guidelines, which are integral to the underwriting process. These guidelines dictate borrower eligibility, mortgage structure, property types, and income sources, setting a national standard for lending practices.

Furthermore, Fannie Mae's guidelines aim to ensure borrowers' creditworthiness and ability to afford their mortgage payments. One significant component of these guidelines is income verification and analysis.

Notably, Fannie Mae recognizes retirement income, providing an avenue for retired or near-retired individuals to secure, refinance, or modify a home mortgage.

Fannie Mae Guidelines on Using Retirement Income

Scope of Retirement Income

Retirement income encompasses a wide range of income sources that a borrower may receive upon retirement.

Regular Retirement Pensions

These are funds received from an employer-sponsored pension plan. They are typically structured as either defined benefit or defined contribution plans.

Social Security Benefits

Social Security is a federal program that provides benefits to retirees, their survivors, and workers who become disabled. The monthly benefit amount is based on the individual's earnings history.

401(k) or IRA Distributions

401(k) and Individual Retirement Accounts (IRA) are tax-advantaged retirement savings accounts. Distributions from these accounts qualify as retirement income.

Other Types of Retirement Income

Other income sources can include annuities, distributions from retirement savings plans, and other government retirement benefits.

Scope of Retirement Income

Eligibility Criteria for Using Retirement Income

Requirement of Continuity

Fannie Mae guidelines stipulate that the retirement income must continue for at least three years from the date of the mortgage application.

For example, if a borrower is receiving pension payments, the lender must verify that these payments will continue for at least the next three years.

Verifiability of Retirement Income

Lenders must also be able to verify the retirement income. This requirement involves confirming the amount, frequency, and duration of the income. The specific method of verification may vary depending on the type of retirement income.

Documentation Needed to Verify Retirement Income

To verify retirement income, lenders typically need to review certain documentation.

Benefits Statement for Regular Pensions and Social Security

For pensions and Social Security income, lenders typically need to see a benefits statement. This statement generally indicates the monthly benefit amount and the duration of the payments.

Tax Returns and Account Statements for 401(k) or IRA Distributions

For income from 401(k) or IRA distributions, lenders may need to review tax returns or account statements. These documents can show the amount and frequency of the distributions.

Documentation Needed to Verify Retirement Income

Calculating the Borrower's Retirement Income

Once the lender has verified the retirement income, they can then calculate the borrower's total retirement income.

Expected Monthly Income Calculation

This calculation is typically based on the borrower's expected monthly income from all verified retirement income sources.

For instance, if a borrower receives $1,000 per month from Social Security, $500 per month from a pension, and $500 per month from an IRA, the total expected monthly income would be $2,000.

Factors That May Impact Income Calculation

Certain factors can impact the income calculation, such as the volatility of the income (if the income fluctuates from month to month) and the potential for the income to decrease (if the borrower is withdrawing from a finite account like an IRA or 401(k)).

Considerations When Using Retirement Income for Qualifying Purposes

Using retirement income for qualifying purposes carries some unique considerations.

Stability of Retirement Income

Lenders consider the stability of retirement income. Pensions and Social Security benefits are usually stable since they are generally the same amount each month. Income from 401(k)s or IRAs may be less stable if the borrower is withdrawing varying amounts.

Changes in Retirement Income Over Time

Retirement income may change over time. For instance, some pensions may provide a larger initial payout that decreases after a certain period. Lenders must consider these potential changes when qualifying the borrower.

Exceptions and Special Cases

There are exceptions and special cases that Fannie Mae guidelines cover.

Annuitized Retirement Accounts

Retirement accounts can be annuitized, meaning the account is converted into a stream of guaranteed payments. Fannie Mae guidelines have specific instructions for handling these cases.

Non-traditional Retirement Income

Some borrowers may have non-traditional retirement income, like income from investments or rental properties. Fannie Mae guidelines detail how to consider this type of income.

Borrowers Nearing Retirement

For borrowers nearing retirement, lenders may need to consider the borrower's post-retirement income.

If a borrower's income will decrease upon retirement, this could impact the borrower's ability to pay their mortgage. Fannie Mae guidelines provide insight into handling these situations.

Implication of These Guidelines on Borrowers and Lenders

Borrowers' Perspectives

Advantages of Using Retirement Income for Mortgage Qualification

  • Expanding the Pool of Resources for Home Loans: Retirement income introduces a new avenue of financial resources for borrowers. This income, which can often be overlooked, can significantly boost borrowing capacity when securing a home loan.

  • Unlocking Opportunities in the Housing Market: The inclusion of retirement income in mortgage calculations creates opportunities. The use of retirement income can enable a wider selection of housing choices during retirement years.

Challenges and Risks

  • Risk of Depleting Retirement Funds: Borrowers drawing income from finite resources like a 401(k) or IRA may face a decline in retirement funds potentially causing difficulties in meeting mortgage obligations and increasing default risk.

  • Complexity of Verification and Calculation Process: Retirement income variability complicates the mortgage application process, making the verification and calculation of this income challenging and time-consuming for borrowers.

Lenders' Perspectives

Impact on Mortgage Approval Process

From a lender's perspective, the inclusion of retirement income in Fannie Mae's guidelines broadens the pool of eligible borrowers.

However, it also adds another layer of complexity to the mortgage approval process. Verifying and calculating retirement income can require additional time and resources compared to traditional income sources.

Risk Management Strategies

Given the potential variability and decrease of retirement income over time, lenders must employ prudent risk management strategies.

These might include requiring additional documentation, performing detailed analyses of retirement income stability, and considering potential changes in retirement income when qualifying borrowers.

Comparison With Other Home Loan Providers' Guidelines on Retirement Income

Freddie Mac's Guidelines

Freddie Mac, like Fannie Mae, recognizes retirement income in their underwriting guidelines. However, there may be slight differences in the type of documentation required and the methods used to calculate and analyze retirement income.

Federal Housing Administration (FHA)'s Guidelines

FHA loans are insured by the federal government and have more lenient qualification criteria. The FHA also accepts retirement income, including Social Security, pensions, and distributions from retirement accounts. However, their guidelines may differ in specifics.

Veterans Affairs (VA)'s Guidelines

The VA's loan program, geared towards service members and their families, also recognizes retirement income. This includes military retirement pay and other forms of retirement income.

Fannie Mae Guidelines vs Other Home Loan Providers' Guidelines on Retirement Income

The Bottom Line

Fannie Mae's guidelines provide a comprehensive framework for using retirement income in mortgage lending.

These guidelines cover various forms of retirement income, from pensions and Social Security to distributions from retirement accounts, and offer detailed directives on verifying, calculating, and analyzing this income.

For borrowers, the key takeaway is that retirement income can be used to qualify for a mortgage, opening up home ownership possibilities during retirement.

For lenders, these guidelines offer valuable insight into handling retirement income, a potentially complex and variable income source.

Planning for retirement is a complex process, especially when considering large financial decisions like home mortgages.

Therefore, it's essential to seek professional retirement planning services. These experts can help navigate the complexities of retirement income, ensuring that you maximize your financial resources for a secure and comfortable retirement.

Fannie Mae Guidelines on Using Retirement Income FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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