Does it affect your ability to qualify for a mortgage if you withdraw money from a retirement account? I am going to use funds from my retirement account to pay a large bill and want to understand if this hurts me when I apply for a mortgage.

By Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Edited by Michael Jensen, Mortgage and Finance Guru

Updated October 20, 2020

Unless you intend to use the funds in your retirement account to qualify for the mortgage or to buy the home, as outlined below, making a withdrawal should not affect your mortgage application.  In fact, if you use the funds to pay off a significant bill, debt or loan and you reduce your monthly debt expense, it can help you qualify for the mortgage.  

The scenarios when making a withdrawal from a retirement account can cause an issue when you apply for a mortgage include the following:

You use the account as a source of income.  If you rely on dividend, interest or distribution income from a retirement account then making a withdrawal and reducing your account balance may affect your income and the mortgage you qualify for. 

You intend to use the account for your down payment.  In this scenario, you need to make sure you have enough funds remaining in your account after making the withdrawal and paying any applicable penalties and taxes to also pay for your down payment.

You plan to use the account to meet the reserve requirement for the loan.  Some lenders and loan programs require you to hold savings in reserve when your mortgage closes and you may want to use your retirement account for this purpose.  If you make a withdrawal from the account, make sure you have sufficient funds in the account to meet the reserve requirement, if applicable.

Please note that if you are not using your retirement account for any of the reasons listed above, lenders usually discount or ignore the account because the funds may not be immediately available to you.  In this case, using funds from the account to pay off or down a debt may be help you improve your debt-to-income ratio and increase the mortgage you can afford.

For example, if you have a $15,000 credit card balance with a $500 monthly payment, you could use funds from your retirement account to pay off the debt and eliminate the payment from your debt-to-income ratio.  The lower your monthly debt expense, the higher the mortgage amount you qualify for.  This is an example of when making a withdrawal from your retirement account can help you get approved for a mortgage.   

Use ourMORTGAGE QUALIFICATION CALCULATORto determine the mortgage you can afford based on your income and monthly debt  

Taking money out of your retirement account only works if you do not need the funds to qualify for the loan or if you have sufficient funds remaining after making the withdrawal.  For example, if you want to pay off a $15,000 debt and use $20,000 in funds for your down payment on a home, but you only have $25,0000 in your account, then paying off the debt may not make sense because you do not have enough money leftover to pay for the down payment.

This consideration is particularly important if you rely on the retirement account for income that you need to qualify for the mortgage.  Tapping into your retirement account may enable you to lower your monthly debt expense but may also reduce the income produced by the account.  If your income is too low, you may not be able to afford the loan.

The final point we want to highlight is that you may be required to pay a penalty or taxes on withdrawals you make from your retirement account.  We recommend that consult a tax specialist or accountant before you decide to take out any funds.   

In closing, although the answer to your question depends on your specific circumstances, in most cases taking money out of a retirement account should have minimal impact on your ability to get approved for a mortgage.  Depending on how you use the funds, it may potentially help you.

The table below shows mortgage terms for leading lenders in your area.  We recommend that you contact multiple lenders to confirm their qualification guidelines.  Shopping lenders is also the best way to save money on your mortgage.

Sources

"Retirement Topics - Exceptions to Tax on Early Distributions."  IRS.  Internal Revenue Service, October 29 2019.  Web.