Do Retirement Accounts Count as Assets for a Mortgage?

When applying for a mortgage, funds in retirement accounts like 401(k)s and Individual Retirement Accounts (IRAs) are considered assets. However, lenders view and utilize them under specific rules. These funds are assessed differently than money in a standard checking or savings account due to their long-term nature and the potential penalties for early withdrawal.

How Lenders View Retirement Assets

Lenders view retirement funds as a source of financial stability rather than readily available cash. Unlike liquid assets, money in a 401(k) or IRA is not immediately accessible without potential tax consequences and penalties. This distinction leads lenders to apply a valuation adjustment to your retirement account balance.

Lenders consider only a percentage of the vested account balance, often up to 70%, when evaluating your financial standing. The exact percentage is up to the lender. This discount accounts for potential federal and state income taxes and the 10% early withdrawal penalty for individuals under age 59 ½.

The vested amount is the portion of your retirement account that you own outright. While your own contributions are always 100% vested, employer matching funds often have a vesting schedule where you gain ownership over several years. Lenders are only concerned with the vested balance, as this is the money you have a legal right to access.

Documentation Needed for Your Lender

To verify your retirement accounts, you must provide specific documentation to your lender. Lenders require the most recent one or two months of statements for each account. If your plan issues statements quarterly, the most recent one will suffice.

You will also need to provide the “terms and conditions of withdrawal” for each plan. This document outlines the rules for accessing your funds, proving to the lender that you are permitted to make withdrawals or take out a loan against the account.

When reviewing your statements, locate the vested balance, as this is the figure the lender will use. The location of this amount can vary between financial institutions.

Accessing Funds for a Down Payment or Closing Costs

If you need to use money from your retirement account for a down payment or closing costs, there are two primary methods. The first is an early withdrawal, or distribution. The funds you withdraw are treated as ordinary income for that tax year, and you will pay the corresponding income taxes. If you are under age 59 ½, the distribution is also subject to a 10% early withdrawal penalty by the IRS.

A second method for many 401(k) plans is to take a loan against your account balance. IRS rules permit you to borrow up to 50% of your vested balance, with a maximum of $50,000. The advantage of a 401(k) loan is that you are borrowing from yourself, and the interest you pay goes back into your own retirement account.

A 401(k) loan is not a taxable event, and no early withdrawal penalty applies. The loan must be repaid, over a five-year term, through payroll deductions. It does not affect your credit score or your debt-to-income (DTI) ratio because it is not reported to credit bureaus.

Using Retirement Accounts to Meet Cash Reserve Requirements

Lenders require borrowers to have cash reserves, which are funds available to cover a certain number of monthly mortgage payments after closing. This demonstrates you have a financial cushion. Retirement accounts can be used to satisfy this requirement without you having to withdraw any money.

To use these funds for reserves, the lender will use the documentation you have already provided. They will then count a percentage of your vested balance toward the cash reserve requirement. This allows you to leverage your long-term savings to strengthen your mortgage application.

Using your retirement funds this way allows you to meet the lender’s requirements without triggering a taxable event or incurring penalties. The money remains invested and continues to grow for your retirement while helping you secure your home loan.