Qualifying for a mortgage with 401(k) and IRA distributions is allowed under every major loan program, but lenders test this income more strictly than a paycheck. Two rules govern almost everything: the distributions must be expected to continue for at least three years from the date of the mortgage note, and you must have unrestricted access to the funds.1Fannie Mae. Fannie Mae Selling Guide – B3-3.1-01, General Income Information2Fannie Mae. Employment Related Assets as Qualifying Income If you’re already taking regular distributions, the lender uses that payment history. If you have a large balance but small or no draws, the lender can convert the balance into monthly qualifying income using an asset depletion formula.
Unrestricted Access and the Age 59½ Question
Unrestricted access means you hold the unqualified right to request a full distribution from the account, whatever taxes or penalties might follow. Balances you can’t reach don’t count. If your 401(k) blocks withdrawals while you’re still employed by the plan sponsor, or if part of your balance hasn’t vested, those dollars are off the table.2Fannie Mae. Employment Related Assets as Qualifying Income
Age matters because of the IRS’s 10% additional tax on most withdrawals taken before 59½.3Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Being under 59½ does not disqualify you, but when an early withdrawal penalty applies, the lender must subtract that penalty from the account balance before running the asset depletion math.2Fannie Mae. Employment Related Assets as Qualifying Income Borrowers at or past 59½ skip that haircut and end up with a higher qualifying figure.
Substantially Equal Periodic Payments Before 59½
If you’re younger than 59½ and want retirement distributions to serve as your income for the loan, the cleanest route is a Substantially Equal Periodic Payments arrangement. SEPP lets you withdraw from an IRA, 401(k), or similar account without the 10% penalty, provided you commit to a fixed schedule calculated using one of three IRS methods: required minimum distribution, fixed amortization, or fixed annuitization.4Internal Revenue Service. Substantially Equal Periodic Payments
The commitment is real. Once you start, you cannot modify the payments until the later of five years or the date you turn 59½. No extra withdrawals, no additional contributions, no changes to the amount, except under the RMD method, which recalculates annually. Break the schedule early and the IRS applies the 10% penalty retroactively to every distribution you took, plus interest.4Internal Revenue Service. Substantially Equal Periodic Payments For mortgage purposes, though, SEPP produces exactly what underwriters like: predictable, penalty-free, documentable payments.
The Three-Year Continuity Rule
If your retirement income depends on drawing down a finite balance or has a defined expiration date, it must be expected to continue at least three years from the note date.1Fannie Mae. Fannie Mae Selling Guide – B3-3.1-01, General Income Information The clock starts when you sign the note, not when you apply, so a long closing shifts the goalposts in your favor. Balances across eligible 401(k), IRA, and Keogh accounts can be combined to show the money will last.5Fannie Mae. Annuity, Pension, or Retirement Income
Turning a Balance Into Monthly Income
When your current distributions aren’t large enough to qualify, or you haven’t started them yet, the lender can use an asset depletion calculation. Fannie Mae’s version starts with the eligible balance, subtracts any early withdrawal penalty that would apply on a full liquidation, then subtracts funds earmarked for down payment, closing costs, and required reserves. The remainder, called Net Documented Assets, is divided by the number of months in the loan term.2Fannie Mae. Employment Related Assets as Qualifying Income
On a 30-year loan, picture a $500,000 IRA with the borrower under 59½. Subtract $50,000 for the 10% penalty, leaving $450,000. Take away another $100,000 for down payment and closing costs and you have $350,000 in Net Documented Assets. Divide by 360 months and you get $972 per month in qualifying income.2Fannie Mae. Employment Related Assets as Qualifying Income For the same borrower at 59½ or older, no penalty applies, so $400,000 divided by 360 produces about $1,111 per month. The age difference alone is worth roughly $139 a month here.
The method has limits. It’s only available when your existing distributions can’t already carry your debt-to-income ratio on their own, so you can’t use it to top off qualifying income you already have.2Fannie Mae. Employment Related Assets as Qualifying Income Several asset categories are excluded outright:
- Stock options and non-vested restricted stock
- Proceeds from lawsuits, lottery winnings, real estate sales, inheritance, or divorce
- Virtual currency
- Checking and savings balances, unless they originated from an eligible source such as a severance package or lump-sum retirement distribution
Grossing Up Roth and Other Nontaxable Distributions
Qualified Roth IRA distributions come out tax-free, which understates them next to pre-tax pension or 401(k) income. Fannie Mae lets the lender increase nontaxable income by 25% for qualifying purposes, so $3,000 a month in Roth distributions can be counted as $3,750.1Fannie Mae. Fannie Mae Selling Guide – B3-3.1-01, General Income Information If your actual combined federal and state tax rate is higher than 25%, the lender can use that. The income and its tax-exempt status both have to be expected to continue. Flag any Roth or nontaxable component to your loan officer, because a missed gross-up can be the difference between approval and a short qualification.
Documentation the Underwriter Will Ask For
Past Distributions
IRS Form 1099-R is the primary record for distributions from retirement plans, pensions, and annuities, showing the gross amount and any taxable portion.6Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Lenders typically want two years of 1099-Rs.
Current Account Statements
Provide the most recent monthly or quarterly statement showing your name, account number, current balance, and the institution’s information. For asset depletion, the statement also has to show what the account holds (stocks, bonds, mutual funds) so the lender can confirm the holdings qualify.7Fannie Mae. Retirement Accounts If closing slips, expect a request for updated statements; expired paperwork is one of the most common causes of late delays.
Ongoing Access and Continuity
A distribution letter or award letter from the plan administrator or financial institution should state the frequency and amount of the payments and confirm they’ll continue. For 401(k) balances, the lender also needs proof that the plan allows withdrawals given your current employment status. If you’ve left the sponsoring employer, this is easy. If you haven’t, a letter from the plan administrator confirming your withdrawal rights may be required.7Fannie Mae. Retirement Accounts
FHA, USDA, and VA Loans
Government-backed programs follow the same shape with their own paperwork wrinkles. FHA requires that retirement distributions be “reasonably likely to continue” for at least three years from the application date, supported by the most recent account statement and either tax returns or bank statements showing receipt.8U.S. Department of Housing and Urban Development (HUD). FHA Single Family Housing Policy Handbook 4000.1
USDA guaranteed loans treat retirement and pension income as recurring payments; the income must be documented and expected to continue at least three years to count in debt ratios. The USDA underwriter has significant discretion in deciding whether income is “stable and dependable,” and that judgment is not made by the automated system.9USDA Rural Development. Single Family Housing Guaranteed Loan Program Overview – 101
VA loans also accept retirement distributions, though the specific documentation varies by lender. A VA-approved lender can spell out what’s needed for your situation.
The Tax Cost of Withdrawing More Just to Qualify
Borrowers sometimes decide to raise their 401(k) or traditional IRA withdrawals to reach a bigger loan. Every dollar taken from a pre-tax account is ordinary income, so pulling more can push you into a higher bracket, and if you’ve committed to larger ongoing distributions to satisfy the three-year continuity rule, that tax hit isn’t a one-time event.
Medicare recipients feel this more sharply. Part B premiums are set from your modified adjusted gross income two years earlier. In 2026 the standard monthly premium is $202.90, but income above $109,000 for individuals or $218,000 for joint filers triggers income-related surcharges that can more than triple the premium; the top tier pays $689.90 per month.10Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles Increasing IRA withdrawals by $30,000 to qualify can easily add $1,000 or more per year in Medicare premiums on top of the income tax. Roth distributions generally don’t count toward MAGI for IRMAA, which is another reason to draw from Roth accounts first when you have the choice.
Often the better move is to let the asset depletion formula produce the qualifying income on paper, rather than raising your actual distributions and creating real tax exposure to match.