How to Get a Mortgage During Retirement

How to Get a Mortgage During Retirement

People have many reasons to move after they retire.  Some want to relocate to a better climate or be closer to family.  Others just want to move into the house or retirement community in Las Vegas (or elsewhere) they always dreamed of.  Whatever the reason, retirees need money to buy their new home, and some don’t want to use the equity from their old home to buy a new one.  That leaves them in need of financing, but can they get a mortgage without a paycheck? 

Can a Retired Person Get a Mortgage?

You can get a mortgage after retirement, and the requirements are the same for retirees and working people (age discrimination is illegal under the Equal Credit Opportunity Act).  The problem is that, as a retiree, you may have a difficult time proving you have the stable income that makes the loan a good investment for your lender.  Luckily, there are ways to use the assets you’ve accrued during your working years to illustrate you’re a good bet to your lender.

How a Retiree Can Qualify for a Mortgage

Retirees can still prove that they have enough income to meet a new mortgage payment, even if they no longer earn a paycheck.  There are several different ways to do this.  The way you decide to proceed should be based on your own specific circumstances and in consultation with a professional. 

What Counts as Income for a Mortgage When Retired?

Social Security, Pension, Passive Income

Any combination of Social Security, work pension, and dividends all count towards your income requirement for a mortgage.  Likewise, if you can prove an annuity will continue for at least three more years after the application, you can use that as well. 

IRA or 401k

Using your IRA or 401k can be tricky since you need to be 59 ½ years old for unrestricted access.  Also, they need to last for 3 or more years after your application, and if they hold stocks, bonds, or mutual funds, your lender will only use 70% of their value due to potential volatility.

Drawdown on Retirement

If you are a retiree who is over 59 ½, you can do a “drawdown on retirement.”  In this scenario, your lender will count any withdrawals from retirement accounts as proof of income, provided they have been regular for at least 2 months. 

Depending on your lender, they may ask you to provide a letter from your bank or financial planner verifying the withdrawals.  A “drawdown on retirement” is one of the simplest ways for a retiree to get a mortgage.

Asset Depletion

If you are heavily invested, you could consider asset depletion as a viable way to get a mortgage.  For an asset depletion, you would add up your financial assets and subtract the amount you would use for a down payment. 

You would then take 70% of the remainder and divide it by 360, the number of months you would need to cover for a 30-year mortgage.  That final amount would be the amount your lender would use to qualify you in addition to any other income streams.

Total Housing Expenses and Debt to Income

As with any other mortgage, your lender will probably require that income and expenses follow the 28/36 rule; that is, your total housing expenses cannot exceed 28% of your income and the cost to service your debt can be no greater than 36%. 

Lenders put these rules in place to protect their investment.  If your housing expenses or debt costs become too great, you will struggle to pay your mortgage, becoming “house poor.”  It is in the lender’s best interest to install safeguards like the 28/36 rule to reduce the chances of borrowers defaulting on their loans.

Calculating Expenses

You can start calculating your prospective total housing expenses by adding up your monthly principal, interest, taxes, and insurance on the new house (PITI). For some people, PITI represents the entirety of their total housing expenses, but you may also have to factor in Homeowner’s Association (HOA) fees, maintenance, and utilities.  Very few lenders will give you a mortgage loan if your total housing expenses exceed 28% of your income.

Your Debt-to-Income ratio (DTI) is the percentage of your monthly income given over to service your debt.  It includes your PITI plus any alimony or child support payments, credit payments, other loans, and loans you may have cosigned. 

Your DTI must be lower than 43% to be eligible for a Qualified Mortgage, but the consensus among lenders is that 36% is a better indicator of a borrower’s ability to make their mortgage payments reliably. 

Getting a Mortgage When Retired: Other Requirements

Lenders have further requirements for mortgage approval, though there may be significant variation from one lender to another.  In addition to your income, you will need to illustrate a level of post-closing liquidity.  Most lenders will require that you have at least 6 months’ worth of your PITI in liquid assets as a reserve in case of unforeseen financial hardship. 

Credit Score

Every lender will have a credit score requirement.  Regardless of what your lender demands, aim for at least 780 to be eligible for the lowest rates.  As a retiree, you’ve been hearing for decades how important a solid credit rating is, and it has never been truer than when you are seeking a mortgage after retirement.  With all the intricacies of proving you have sufficient income to cover the loan payments, a stellar credit rating may earn you a little latitude on some of the other requirements.

Down Payment

At the end of the mortgage process, you will likely need to offer a large enough down payment to satisfy the lender and potentially reduce your monthly payments.  If you are doing a “drawdown on retirement” approach to calculating your income, you should only be required to offer 5%. 

Be warned, however, as 5% can leave you with much larger monthly payments.  A mortgage that is granted on an asset depletion model will require 30% down, which is much larger but lowers your monthly payments substantially. 

Pick the Path That Suits Your Situation

You can absolutely get a mortgage in retirement.  Lenders are not allowed to discriminate against people because of their age, so you are held to the same standards as any other mortgage applicant. 

The difference, and your responsibility, is that it may be a bit trickier for you to illustrate an income that satisfies the lender’s requirements.  But whether you use various income streams, a drawdown on retirement strategy, or asset depletion, all three are common ways for retirees to get approved for a mortgage and start their retirement off in the home they always wanted.

Helpful Resources

*Disclaimer: This material is provided for information purposes only and is not to be construed as investment or tax advice. Readers are strongly advised to consult with their professional advisors regarding the information herein.

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