Why Haven’t Loan Officers Been Told These Facts?

Many consumers have significant wealth but not so much cash that mortgage-free residential real estate is possible. For instance, many retirees or soon-to-be retirees fall under this rubric. MLOs often struggle with what some industry stakeholders describe as “private banking” oriented underwriting.

Lenders sometimes refer to Private banking as the tailored services consumers require with higher-than-average liquid assets.

Considering 401(K), IRA, or Similar Employment-Related Assets as Qualifying Income


5305.2 Retirement account distributions as income (e.g., 401(k), IRA)

Distributions from retirement accounts recognized by the Internal Revenue Service (IRS) (e.g., 401(k), IRA) that are not subject to penalty (e.g., early withdrawal penalty) may be considered stable monthly qualifying income. Evidence of the income source, type, distribution frequency, distribution amount(s), current receipt (as applicable) and history of receipt (as applicable), must be documented.


Document that sufficient assets remain in the retirement account(s) after closing to support continuance of the retirement account distributions as income for at least the next three years.

If the retirement account(s) from which the Borrower is currently taking distribution is projected to be depleted within three years, the Borrower’s additional retirement accounts may be considered when determining continuance of income used for qualifying. The Seller must verify that the Borrower has sufficient eligible retirement assets in aggregate to support the amount of qualifying income for at least three years after the Note Date. The additional retirement assets used to verify continuance may not be used as a source of funds for closing or reserves, as a current source of income for the Borrower, or for the calculation of assets as a basis for repayment of obligations described in Section 5307.1.


(a) Mortgage eligibility requirements

The assets described in this Section 5307.1 may only be used to qualify the Borrower if the Mortgage meets all of the following requirements:

  • The Mortgage is secured by a 1- or 2-unit Primary Residence or a second home
  • The Mortgage is either a purchase transaction Mortgage, “no cash-out” refinance Mortgage or Freddie Mac Enhanced Relief Refinance® Mortgage
  • The Mortgage has a maximum loan-to-value (LTV)/total LTV (TLTV)/Home Equity Line of Credit (HELOC) TLTV (HTLTV) ratio of 80%, unless the Mortgage is an Enhanced Relief Refinance Mortgage, in which case the maximum ratios in Section 4304.3 apply

(b) Asset calculation for establishing the debt payment-to-income ratio

To determine the amount used to establish the debt payment-to-income ratio, the Seller must use the net eligible assets (as described below), divided by 240.

The amount of net eligible assets is calculated by subtracting the following from the total eligible assets:

  • Any funds required to be paid by the Borrower to complete the transaction (e.g., Down Payment and Closing Costs)
  • Any gift funds and borrowed funds, and
  • Any portion of assets pledged as collateral for a loan or otherwise encumbered

The retirement assets must be in a retirement account recognized by the Internal Revenue Service (IRS) (e.g., 401(k), IRA).

(c) Asset eligibility and documentation requirements

“The asset must not currently be used as a source of income by the Borrower.”


The FHLMC 5307.1(c) asset eligibility requirement is somewhat opaque. Would this mean the asset is not presently considered income-related to qualification for another transaction, or is it what a plain text reading renders that the borrower has yet to withdraw from the asset? Either way, on the surface, how the requirement mitigates Freddie’s risk is uncertain. Ensure your fulfillment partner is clear on what the 5307.1(c) asset eligibility condition means.

From FNMA – B3-3.1-09, Other Sources of Income (11/01/2023)

To calculate the asset’s stable monthly income, FNMA requires that the seller divide the net asset by the months in the loan term, whereas FHLMC requires the same calculus but with a standard 240 divisor.

For example, assume $2,000,000 in eligible retirement accounts—30-year mortgage term.

  • FNMA 2M/360 = $5,557 stable income
  • FHLMC 2M/240 = $8,333 stable income

However, assume the same example with a 15-year mortgage term.

  • FNMA 2M/180 = $11,111 stable income
  • FHLMC 2M/240 = $8,333 stable income

Develop a Fallback Plan

Alternatively, if the asset fails to meet the employment-related asset conditions, the assets may still merit income consideration as interest, dividends, and capital gains income, perhaps yielding a more significant stable monthly income than employment-related asset calculations.

For example, assume a 2M portfolio. For 2021 and 2022, the applicant had combined dividends, interest, and capital gains of $356,000, with the 2022 asset income slightly higher than 2021.

  • FHLMC/FNMA $356K/24 = $14,833 stable income

Follow the path of least resistance. Use whichever approach is more compelling and fits better with the credit policy. Generally, the calculation that yields the lowest stable monthly income is the safest to use when calculating ratios. However, the calculation requiring less documentation and policy gymnastics might be more prudent. As part of your risk management, have a fallback plan. Obtain the documentation necessary to go either way. Don’t neglect to account for depleted assets. Watch the provisos for capital gains and minimize unnecessary risk layering.

There can be many moving parts to using asset income as a stable income. Some lenders have underwriters who are well-versed in private banking. Others, not so much. When you can avoid being part of someone else’s learning curve, make it so. Keep an eye on the primary constraints: LTV, CLTV, HCLTV, and transaction type.

Another helpful aid is the FNMA FAQ

FAQ #3: Do I need to reduce an IRA value by 30% to determine 3 years continuance for income?

Answer #3: The requirement to reduce the value of retirement assets consisting of stocks, bonds, and mutual funds by 30% when measuring the three-year continuance for retirement income was removed from the Selling Guide B3-3.1-09, Other Sources of Income in December 2020. Refer to Selling Guide Announcement SEL-2020-07.

FAQ #5:
What income should be used if a borrower is currently employed but the employer has notified the lender the borrower has elected to retire?

Answer #5: The lender must qualify the borrower on the lower of the two pay structures, which can be confirmed through the employer or the borrower’s retirement election documentation.
For additional information, see B3-3.1-01, General Income Information and B3-3.1-09, Other Sources of Income.

FAQ #12:
What are the loan parameters to use employment-related assets as qualifying income? Maximum LTV, CLTV, and HCLTV Ratio?

Answer #12: 70%. 80% if the owner of the asset(s) being used to qualify is at least 62 years old at the time of closing. If the asset(s) is jointly owned, all owners must be borrowers on the loan and the borrower whose employment-related asset is being used as income must be at least 62 years old at the time of closing.

FNMA Retirement Income FAQ

FHLMC 5305.2 Retirement account distributions as income (e.g., 401(k), IRA)

FHLMC 5307.1 Assets as a basis for repayment of obligations

FNMA B3-3.1-09, Other Sources of Income (11/01/2023)


Do you have a great value proposition you’d like to get in front of thousands of loan officers? Are you looking for talent?


BEHIND THE SCENES – More Affordable Housing Enhancements

Effective Immediately, HUD Permits Subject ADU Income As Effective Income

Date: October 16, 2023
Mortgagee Letter 2023-17

From HUD:

FHA programs currently allow for the purchase, rehabilitation, or refinance of Properties that include a single ADU. FHA does not, however, presently allow for the inclusion of income from the ADU in the Borrower’s Effective Income for purposes of qualifying for an FHA-insured Mortgage.

FHA recognizes that ADUs can serve to enhance the generational wealth-building potential of homeownership. Additionally, ADU rental income can contribute to Mortgage Payments and help Borrowers sustain long-term homeownership.

To support the goals of increasing the stock of affordable housing and expanding opportunities for wealth building and homeowner stability, FHA is updating its appraisal protocols, underwriting requirements, and HECM financial assessment guidelines to permit the inclusion of income from an ADU in the Borrower’s Effective Income for purposes of qualifying for FHA-insured mortgage financing.

FHA is also updating its property eligibility guidelines for the type of improvements eligible under the Standard 203(k) Rehabilitation Program and property types eligible for New Construction as it relates to ADUs.

See the Mortgagee Letter at the link below.
HUD Mortgagee Letter 2023-17


Tip of the Week – 21st Century Technology Eliminates Many Headaches—Another Reason to Use Automated Income and Tax Transcript Services.

Florida Real Estate Agent and Spouse Join the Mortgage Fraud Parade

Orlando, FL – United States Attorney Roger B. Handberg announces that Carlos Ferrer (46, Tampa) has pleaded guilty to one count of conspiracy to commit bank fraud. Ferrer faces a maximum penalty of 30 years in federal prison. A sentencing date has not been set.

According to the plea agreement, Ferrer, co-conspirator Maria Del Carmen Montes, and others conspired to create and executed a mortgage fraud scheme targeting financial institutions. To ensure that otherwise unqualified borrowers were approved for mortgage loans, the conspirators created fictitious and fraudulent paystubs and IRS Form W-2s in the names of companies for which the borrowers had never worked. The bogus income documents falsely indicated that borrowers had worked at these companies, including companies formed and controlled by Ferrer, for a certain period and earned income that they had not. These fictitious paystubs and W-2s were submitted to the financial institutions who relied on them when making underwriting decisions.

To further deceive the mortgage lenders, Ferrer filled in the false employment and employment and income on Verifications of Employment (VOE) sent by the financial institutions. Ferrer then falsely certified and emailed VOEs sent by the financial institution in the names of borrowers that he knew did not work for his companies and lied to the financial institutions during verbal VOE verifications. Based on Ferrer’s misrepresentations, the financial institutions approved and funded the mortgage loans.

This case was investigated by the Federal Housing Finance Agency – Office of Inspector General, the U.S. Department of Housing and Urban Development – Office of Inspector General, and the Federal Bureau of Investigation. It is being prosecuted by Special Assistant United States Attorney Chris Poor.

Learn How 3rd party Originators Can Use Automation

(From FNMA)
Q20. Does the DU validation service support third-party originator (TPO) business models?

Yes. Please engage the report providers directly as they may have specific requirements in terms of who can order, view, and pay for reports.

Wage-related income types

  • Base pay
  • Bonus
  • Overtime
  • Commission

Process for verifying

  1. Order a digital income and employment verification report for each eligible income type. If you are not able to digitally verify income and employment, revert to collecting paper documents.
  2. The income and employment verification report vendor will send you the report(s).

Non-wage related income types

  • Social Security
  • Pension or annuity
  • Self-Employed income (from a Sole Proprietorship)

Process for verifying

  1. Order a tax transcript for each eligible income and employment type.
  2. The tax transcript vendor will send you the transcript(s).

FHLMC Guidance

FNMA Guidance