Many people believe that homeowners should pay off their mortgage before they retire as monthly payments can get more difficult to manage when you have a fixed income. Yet, many retirees and seniors find it more beneficial to go for a mortgage than buying a home with cash or paying off their loan as they can free up more savings for higher expenses like long-term care.
Qualifying for a home loan once you are retired comes with specific requirements, but it does not mean that it is out of reach. There are various loan programs and strategies that help you purchase or refinance a home in any phase of retirement.
WHEN DOES IT MAKE SENSE TO GET A MORTGAGE AS A RETIREE?
Besides freeing up assets, if any of the scenarios given below applies to you, then it is worth considering a mortgage in retirement.
- Sizing down: Empty nesters may downsize to a smaller home to minimize square footage, reduce mortgage debt, save on maintenance costs as well as reduce or pay off other debts.
- Physical challenges: Taking care of and maintaining an old home can be physically taxing especially if you are a senior. Many seniors buy a new home to cut down on upkeep.
- Increasing Fixed Income: By refinancing or selling their homes retirees and seniors will be able to free up some money and use the equity cashed out to fund their retirement.
- Choosing the lifestyle you want to live: Many retirees are allocating out of their state home to look for better weather, favorable taxes, recreation, and other benefits.
QUALIFYING FOR RETIREMENT MORTGAGE
First of all, under the Equal Credit Opportunity Act, no lender can deny mortgages to retirees if they meet all the standard criteria.
1. Qualifying Based on Retirement Income and Assets
Mortgage lenders need to ascertain that a borrower can pay back a home loan. This typically means looking at monthly income based on the borrowers’ W2 tax forms.
But, demonstrating a regular monthly cash flow will be different for seniors as they will not have a regular income. So, mortgage lenders usually consider Social Security, 401(k)s, IRAs, and other assets for qualifying purposes.
- Social Security Income:
The Social Security income is always counted as income. So if you are not paying taxes on it mortgage lenders are allowed to increase this income by 25% for qualifying purposes.
If the borrower is drawing on it with his or her work record then that income is considered not to have an expiration date. However, if it is drawn on a family member’s record (like spouse benefits or survivor benefits), then this must be shown as secure for at least three more years.
The best way retirees can document Social Security income is to have the funds deposited directly to their bank account or use the copies of their award letters from the Social Security Administration and/or proof of current receipt.
- Pension or Retirement Income :
As this is not expected to expire it is counted as income. Some pensions decrease the income amount for spouses. In that case, you need to make sure that your spouse can cover the mortgage as well as the bills after your death.
- Annuities :
Annuities can be listed on a mortgage application if the borrower can document that it will continue for at least three more years.
- 401(k)s, IRAs, or Keogh Retirement Accounts
Underwriting rules acknowledge that you can use funds from 401(k)s, IRAs, or Keogh to qualify for a mortgage. But, these accounts have a defined expiration date as they involve the depletion of an asset. So, borrowers must document that it will last for three years from the date of their home loan application.
Besides, the borrower must also prove unrestricted access to these retirement accounts and without penalty.
If the above accounts consist of stocks, bonds, or mutual funds then lenders can use only 70% of the value of the amount received as income because they are considered volatile.
This is sometimes referred to as “an asset-based loan” or “an asset depletion loan”, though this is not a separate loan type but a method to qualify. Lenders also still count income from other sources like proceeds from the sale of a business for approval of a mortgage.
Therefore, if you have a lot of invested assets this method of determining income may work very well for you.
2. A Great Credit Score
Each lender has different requirements, but a minimum credit score between 720 and 760 will be ideal. As your credit score also affects the interest rate you will qualify for, so the higher the credit score the lower the interest rate.
3. A Low DEBT-TO-INCOME Ratio
You will need to show sufficient income so that you meet the debt-to-income ratio requirements of your mortgage lender. The highest debt-to-income ratio that you need to have is 43% (some mortgage lenders may offer exceptions). This means that 43% of your income can go towards paying total debt amounts like alimony, child support, credit card cards, car, and student loan payments plus the projected mortgage payments which include principal, interest, property taxes, and insurance. The ratio between your total debt payments and income is known as the debt-to-income ratio.
4. Job Stability
Even if you have a part-time job then it is easier to qualify for a mortgage. However, you should be working at the same job for at least two years continuously.
As explained above, seniors and retirees can get a mortgage if they have funds in assets, investment, or retirement accounts. There are some programs that are specially designed to help seniors and retirees finance a new home.
Contact our experts today to know which type of mortgage is best suited to your situation.