March 5, 2021
4 MINUTE READ
How to get a mortgage if you’re retired is a common question. Often, you hear stories of people who are nearing retirement (and planning to move shortly thereafter) but find their new home and take out a mortgage before they even retire. But why?
The answer is simple — many people think that once they’re retired, they won’t be able to secure a mortgage anymore.
Fortunately, this isn’t the case. You can, in fact, get a mortgage even after you retire. Let’s take a closer look at what you should do to get a mortgage once you’ve retired.
Often, retirees think that if they don’t have a paycheck coming in anymore, they won’t qualify for a mortgage, simply due to a lack of income. In reality, however, lenders have a couple of different methods they use to calculate income for retirees who are currently drawing on their existing assets. These methods include:
Drawdown from retirement method.
For retirees who are already retired but have chosen to delay the start of Social Security or their pension income, the best option is often to use a “drawdown on assets” method to determine income. As long as the home buyer is of a certain age, their lender can use recent withdrawals from existing retirement accounts as proof of income.
For instance, if the home buyer can show regular withdrawals of $4,000 per month from an existing IRA, this can be considered their monthly income. Keep in mind that some lenders may require a letter from your financial planner or financial institution as proof of these withdrawals.
Asset depletion method.
For those homebuyers who have many invested assets, this method of determining income may be a great fit. In this method, the lender starts with the buyer’s current value of all financial assets. Then, they subtract the amount that will be used to cover the down payment and any closing costs. Next, they take 70 percent of what’s remaining and divide it by 360 months to determine the monthly income used to qualify the buyer.
Another component of “how to get a mortgage when you’re retired” is your debt to income ration. Once the lender has determined your monthly income as a retiree, your total debt to income ratio and housing expense ratio must also meet the requirements set by the lender. For a mortgage that falls within the safe harbor regulatory requirements, 43 percent or less of your income can go toward your existing debt. This ratio of existing debt to your calculated income is what’s known as your debt to income ratio.
One thing we regularly see that does get retirees into trouble when applying for a home loan is when they’ve co-signed on a loan for their adult children. Even if they’re not helping with the monthly payments, the amount still qualifies as a required debt payment, and this may lessen your chances of qualifying for a new mortgage.
As is the case for any home buyer, your credit health plays a big part in qualifying for a mortgage. Each lender has its own individual requirements when it comes to a credit score, but one universal truth holds true — the lower your credit score, the higher the interest rate you’ll pay. If you want to land the best interest rates, aim for a credit score of 780 or higher.
A better credit score can also give you some leeway when it comes to other qualifying areas, such as a higher than ideal debt to income ratio.
As a retiree, your required down payment can vary depending on the method used for determining your income. If you use the drawdown in the retirement method, you may be required to put down as little as 5 percent. However, if you use the asset depletion method of determining income, your down payment may be closer to 30 percent.
Also, think twice before you consider withdrawing a significant sum out of a retirement account, such as an IRA, to cover your down payment. Whatever you take out will all be counted as taxable income, and taking out such a large sum could actually bump you into a higher tax bracket for the year — costing you significantly more in the long run.
It’s important that you work with a real estate agent who knows how to best serve your unique needs as a retiree. At Reali, all of our agents are experts in the areas they serve. They’ll support you through the entire process, from search to negotiations, throughout the paperwork process and close — and can even help with your online home loan process.
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