Can I get a mortgage after I retire?
The short answer is, absolutely!
But as with anyone applying for a mortgage and buying a home, you will need to meet certain lender requirements including having a good credit rating and an acceptable debt-to-income ratio. Because you are no longer working and don't have the usual two years of W2's to support your mortgage application, the lender will look at your retirement sources of income to determine if you qualify for a loan.
Can a lender decline a mortgage application based on age?
Mortgage lenders consider various factors to determine a borrower's eligibility for a home loan, but age and life expectancy are not one of them, or at least, they are not supposed to. The Equal Credit Opportunity Act prohibits discrimination based on age, in addition to race, religion, national origin, sex, and marital status.
Lenders may ask for your age on mortgage applications, as mandated by the Home Mortgage Disclosure Act (HMDA), for the sole purpose of collecting demographic information. This information is intended to remain confidential and should not be used as a basis for approving or denying the applicant.
There is no specific amount of money required to purchase a home, as lenders prioritize your ability to repay the loan over your income.
"Why would a bank give me a mortgage when I'm 68 and I'm not going to live 30 years to pay it off?
That's not important. Very few home buyers stay in the same home for 20 or 30 years and make all those monthly payments. Most buyers sell and move. The lender only cares that you can make those monthly mortgage payments and that they will get their money back when the home sells... whether you're the one selling it, or your estate selling it after you pass on to the big mortgage-free (and tax free), home in the sky.
What types of mortgages are offered to retirees?
Retirees, seniors, as well as everyone else, are subject to the same underwriting guidelines. In order to qualify for a mortgage in retirement, they must demonstrate the ability to repay by having sufficient income sources or assets.
Lenders adhere to specific guidelines related to retirement income, as set by Fannie Mae, Freddie Mac, and government-backed loan programs (FHA, VA, and USDA). Additionally, there are programs available that allow you to convert assets to income if you do not receive retirement pay from traditional sources such as pensions or Social Security.
Retirees can apply for traditional mortgages like conventional 30-year mortgages, low downpayment FHA loans as well as VA and USDA mortgages... just like younger, "regular" home buyers.
Seniors with a high net worth might consider a retirement mortgage that allows them to convert their assets to income that is used to pay back the loan each month.
Determine Your Income After Retirement.
An applicant's income is important for mortgage qualification. Lenders usually require two years of income documentation. Retirees may need to provide evidence of Social Security, pension, dividends, and interest payments instead of the traditional employee W-2s.
The first step in determining if you can afford to purchase a home is evaluating your income. If you are retired, you might have various sources of income that contribute to your overall household budget. Lenders will usually use two different methods to determine a retiree's monthly income:
Retirees with no Social Security or pension income can use the drawdown on assets method. To do this, they must be at least 59.5 years old. They can withdraw money from their retirement accounts and show it as proof of income. For example, if a retired homebuyer withdraws $5,000 from their IRA every month for at least two months, they will be considered to have a monthly income of $5,000.
To calculate income for a 30-year mortgage using the asset depletion method, start by adding up the current value of all your financial assets. Then subtract any portion of the assets you plan to use for a down payment or closing costs. Finally, divide 70% of the remaining value by 360 months (30 years).
In general, lenders like fixed and predictable income streams. A retiree's income can be variable depending on when they start drawing social security and if their income is tied to how the stock market is performing.
It never hurts setting up a meeting with your financial advisor to discuss the pros and cons of taking on a mortgage post-retirement.
What income sources do lenders consider for retirement mortgages?
Social Security is a reliable source of income in retirement. Lenders see these benefits positively because they are stable. The amount a person gets can change depending on when they claim them. If they start early, they will receive smaller monthly payments, but waiting will result in bigger amounts.
Retirement Account Distributions, like IRA or 401(k) withdrawals, have important details to consider. Required minimum distributions (RMDs) are typically based on the account holder's age. These distributions provide regular income but must be withdrawn consistently. Additionally, if the retirement accounts have stock market investments, the value can fluctuate and impact the distribution amount.
Fixed pensions are particularly stable and can provide reassurance to lenders. However, not all pensions have consistent payouts. Some pensions may fluctuate based on investments and other factors, which can raise lender concerns about their reliability.
For those with diversified portfolios, Investment Returns can be another income avenue. Regular dividends from stocks or interest payments from bonds can provide a steady cash flow. However, one-time sales of investments that lead to capital gains, while beneficial for immediate liquidity, might not be considered a consistent source by lenders.
Part-time work or consultancy provides an additional source of income for individuals looking to supplement their retirement mortgage. The difficulty lies in demonstrating the reliability of this income. But hey, you've worked enough of your life already. It's time to just enjoy the rest of your life!
Finally, rental income can enhance a retiree's financial profile, particularly if they possess one or multiple rental properties. A consistent flow of rental income can be advantageous when applying for a mortgage after retirement.
Regardless of all the above list, you will still want to make sure you have a good credit score which will impact how much home you can afford to buy.
Ideally, try and buy your next home before you retire.
Ideally, if possible, buy your next home BEFORE you retire, while you are still working and have a regular income and W2's. It should be easier to get approved for a home loan since it's likely that your working income will be higher and more consistent than your retirement income.
If you are lucky enough to have cash on hand to buy your next home, then you won't need to rely on getting a mortgage. Alternatively, if you have enough equity in your current home pay for your next home, you can either sell your current home first and then buy, or get a short-term bridging loan or home equity line of credit and buy first, then sell.
If you intend to retire near your current location, you have the option of selling your existing home and moving early into your future retirement home. If you choose to retire farther away, you may need to manage two mortgages until you are ready to move. However, you could rent out the second home until you are ready to move to help offset the mortgage payments,
Note that selling your existing home while buying your next one at the same time with little or no overlap is not an easy balancing act and the stars really need to align. For a lot more on this, please see this article.
If you downsize now, you can use the equity from your current home to your advantage. Selling your current home could provide a larger down payment for a retirement property. Or if you're downsizing to a more affordable home, you might be able to pay cash and avoid a new mortgage altogether. Additionally, you may have leftover money to put towards your retirement funds from the sale of your current home or use that extra cash to improve your retirement property.
In conclusion regarding Can You Get A Mortgage After You Retire... yes you can. As with anyone applying for a mortgage, you'll just need to prove to the mortgage broker or lender that you have solid credit and sufficient monthly income to make those mortgage payments. The only difference is that retirees don't have monthly checks from an employer and have to rely on income sources such as their social security, IRA's, 401K's and other investments. So one of the long list of real estate myths that you can cross off the list is that retired people can't get a mortgage!
This article was written by Seattle and Eastside Realtor Conor MacEvilly who has been in the business since 2008. I hope you enjoyed the post and thanks for visiting my website. If you have any questions about Puget Sounds area residential real estate feel free to contact me. I'm happy to help. My direct line (cell) is 206-349-8477.