The Fannie Mae guidelines for retirement distributions are relatively short and straightforward. So why is there so much disagreement on calculating qualifying income? The main reason is that most borrowers have not set up a formal plan to receive regular distributions. Or, they are trying to change (increase or decrease) the dollar amount to qualify for the loan.
To be eligible to use this source of income, Fannie requires the borrower to have unrestricted access without penalty to the accounts (currently minimum age of 59.5) and regular and continued receipt as verified by the following:
• Letter from organization paying the income indicating distributions have been set up (amount & frequency) ;
• Copies of signed federal income tax returns or 1099 forms (if applicable); and
• Proof of 3-years continuance (assets held in stocks, bonds, & mutual funds discounted to 70%).
Non-Agency investors may have additional criteria. For example, Redwood Trust requires 6-months of receipt prior to the note date if you do not have a 2-year history on tax returns. And, Wells Fargo requires 2-month’s receipt and 5-year’s continuance unless distributions are 25% or less of total qualifying income.
Best practice would always be to review specific investor guidelines and apply extra due diligence if you have any of the following scenarios:
• History of distributions evidenced on the tax returns that don’t support qualifying income;
• Increasing distribution income to qualify for the loan;
• Decreasing income to meet the 3 or 5-year continuance requirement;
• Using 2 or more different accounts to support continuance requirement; or
• Making changes after the application date.
The various investor guidelines and interpretations can be confusing and frustrating. However, it is important to note that this source of income is basically a form of asset depletion, AND only amortized over a 3-year period on a 30-year loan.