Retired? Qualifying for a Mortgage May Be Easier Than You Think
Retirees are the wealthiest demographic in America. More than 60 percent of households headed by people over 65 have assets worth at least six figures and more than 10 percent are into the seven figures. Many aging workers fear they can’t buy a home after they retire because they will be living on a fixed income. Some downsize before they are ready, selling the home they have lived in for many years and rushing the decision to buy a retirement home while they are still bringing home paychecks.
Qualifying for a mortgage after retirement is a little different than it is for buyers who are employed full-time. Retirees need to demonstrate to lenders that they can access retirement savings or investments in addition to Social Security, pensions and other fixed-income sources to create a steady flow of monthly income large enough to qualify for a mortgage. But qualifying for a mortgage after retirement may be easier than you think when shopping for a home that will allow you to age in place.
How retirees can qualify
To document and validate a buyer who is employed full-time, lenders need only a recent pay stub or W-2 and a call to the borrower’s employer to verify employment. For retirees, validating income is a little more complicated.
Before applying for a mortgage after retirement, it’s a good idea for retirees to draw up a budget that shows you have adequate income to account for inflation, an increase in property taxes or health care insurance, and an emergency such as an injury or major illness. Before applying, it’s a good idea to sit down with your lender or mortgage broker and review your budget and assets.
Most retirees have retirement savings and other assets to help pay their living expenses. Lenders have several ways they can calculate income for retirees who are drawing on their assets.
Figuring monthly income
- Drawdown from Retirement Method. For retirees who will be delaying the start of their Social Security or pension income, the best option is to use a “drawdown on assets” method for determining income.As long as the borrower is 59½ or older, lenders can use recent withdrawals from retirement accounts as proof of income. Retirement assets must be in a vested retirement account recognized by the IRS and accessible without any withdrawal penalties. To calculate the potential monthly income, lenders take 70 percent of total retirement fund assets and may subtract closing costs and other loan expenses. Regardless of the loan term, the balance is then divided into 360 months to calculate the monthly installment, which is added to other monthly income to help you qualify for a mortgage for at least two months before applying.For example, lenders want to see bank statements showing withdrawals from an IRA of at least $4,500 per month for at least two months. This $4,500 would be considered monthly income. Lenders may need a letter from a financial planner or financial institution confirming these withdrawal amounts.
- Asset Depletion Method. Retirees with significant investments can use these assets to determine income. With this method, lenders total the current value of financial assets like securities and real estate, then subtract anticipated down payment and closing costs. They then take 70 percent of the remainder and divide by 360 months.For example, assume a buyer has $1 million in financial assets and is going to use $50,000 for a down payment, leaving $950,000. Take 70 percent of that, which is $665,000, and divide by 360. The result, $1,847, is the monthly income used to qualify the borrower. Retirees can then add other fixed monthly income such as Social Security, pensions, and annuities to establish an accurate monthly income to use when applying for a mortgage.You will need a substantial down payment of at least 30 percent if you’re buying a new home or at least 30 percent in equity if you are refinancing.
How to buy a home with a reverse mortgage
Homes are the most valuable assets most Americans own. Reverse mortgages allow homeowners to borrow money against the value of their homes and receive the proceeds as a line of credit, fixed monthly payment or lump sum. The most popular loan type is the home equity conversion mortgage (HECM), which is regulated and insured by HUD.
Homeowners can qualify for a reverse mortgage if they are 62 or older and have sufficient equity in their homes. A HECM borrower can keep the reverse mortgage for as long as they own the home and can pay it off with proceeds when they sell it. The lender cannot force out borrowers as long as they keep up with taxes, insurance, and upkeep, even if the mortgage debt is more than the home is worth.
HECMs can be used to buy a new home in two ways. A retiree can liquidate enough assets to pay cash for the new home, and then get a reverse mortgage to pull equity from the new property to replace the assets that were used to buy the home. If there aren’t enough assets available to do that, a retiree can get a regular mortgage to buy the home and then take out a reverse mortgage to pay it off. Borrowers would pay closing costs for both loans and would need a decent credit rating and enough income to qualify for the first loan.
A retiree may prefer to combine part of the reverse mortgage to help pay for the house and retain the remainder for future use. The challenge is to find the mix that best meets a retiree’s needs.
In addition to demonstrating adequate steady income, retirees should pay down existing debt as much as possible.
When reviewing an application, lenders look at the ratio of payments to service monthly debt to gross monthly income to arrive at a debt-to-income (DTI) ratio. Fannie Mae or Freddie Mac will not buy a mortgage with a DTI exceeding 43 percent. Borrowers should try to lower their monthly debt payments to reach a DTI of 24 percent, the current average for conventional loans to purchase a home.
Work with a specialist
With the aging of the Baby Boomer generation, retirees are an important market for real estate professionals. Last year 17 percent of all homes sold in America were bought by buyers aged 65 or older. Three percent of all first-time buyers in 2017 were over 65!
Seniors are such an important market that in recent years the National Association of Realtors created a special designation, SRES (Seniors Real Estate Specialist), for Realtors who have received training in working with older buyers and sellers, and where you can find an SRES specialist in your market.