Are you retired or about to retire and want to get a mortgage? Believe it or not, it is possible to get a mortgage as a retiree with some employment income or even none at all. In some cases, retired home buyers may have the ability to pay cash for their house but may want to get a mortgage to save cash and/or for tax purposes.
While qualifying for a mortgage after you stop working is different, it is still possible. There are special mortgage guidelines that address different situations for retirees. Some people may be fully retired and get Social Security benefits or may have other pension income. Other people may keep part time jobs, and others might stay in the working world in their professional capacity on a part time basis.
This is not an unusual situation. The Bureau of Labor Statistics states that 20% of Americans who are 65 or older still work in some capacity. The good news is that many people who are semi or even fully retired can still get approved for a home loan.
There Are Still Many Benefits for Retired Homeowners to Have a Mortgage.
Household Income for Retirees
Most lenders are able to consider the wages from other members of the household. This is helpful; Pew Research found in 2016 that 16% of all adults from 25 to 31 are still living with their parents. This means at least 21 million people are living at home and some pay rent.
For example, you can get a mortgage through the Fannie Mae HomeReady loan which allows income from people who live in the home but are not on the home loan. In this case, the retired home buyer may use the income of an adult child to qualify if they can prove that they have been living together for a while.
Also, many lenders will allow adult children to qualify to buy the home for their older parents, even if the parents are not living with them. This is called a Family Opportunity mortgage. The program is based upon conventional lending guidelines followed by Fannie Mae. The lender may give you a lower, owner occupied interest rate even if the main applicants are not living in the home.
In this scenario, the parents will not be able to qualify for the mortgage loan on their own. Also, the children must have enough assets, income and credit to qualify for the new house. Even with these stricter requirements, this type of lending scenario is quite common. It is a solid option for a retired person who wants to buy a home with a loan but does not have enough income on their own to qualify.
Non-taxable income will go farther than earnings that are subject to income tax, and lenders know this. Fannie Mae’s guidelines state that lenders should give special consideration to sources of income that could be nontaxable.
Lenders under Fannie Mae guidelines are authorized to increase this income to qualify for a mortgage by up to 25%. For example, if you get $1000 per month in Social Security income, then the mortgage application should show your income at $1,250 per month.
If you are in a tax bracket that is above 25%, lenders may ‘gross up’ your nontaxable income by more than the above example. However, you must prove to the lender that the income source is nontaxable. You may need to give the lender tax returns and a benefits awards letter.
Paying Cash for a Home
People save money for retirement, so they can still pay their bills when they are not working. Asset depletion rules for underwriting state that you can pay your bills with a 401k or IRA. For most lending programs, lenders will take the amount you saved and divide it by 360 months, if you have a 30-year loan. If you have $500,000, your qualifying income could be increased by $1,389 per month.
If your account features stocks and bonds, the value of such assets is dropped by 30%. So, if you have $500,000 in stocks, it is dropped to $350,000 and then divided by 360. Retirement accounts can be used even if you are not 59.5 years old. This is the age at which you can withdraw the funds without penalty.
Another option if you are 62 or older is to use a reverse mortgage to buy a home. Most people in this age bracket use a reverse mortgage to refinance a home they own and get rid of monthly payments. But you can use a reverse mortgage to buy a home too. These reverse home loans offer cash out but they are not considered a second mortgage loan.
A benefit of the reverse mortgage is income and credit are not even considered as you do not need to make monthly payments on the loan. The lender still needs to determine if you are able to pay taxes, homeowners insurance and dues for HOA.
The bottom line is that it can make financial sense to get a mortgage when you are retired by using one of the above options. Every situation is unique, so we suggest speaking with a trusted financial planner and experienced mortgage lender before making any major decisions.
Takeaways on Being Retired and Having a Mortgage
Retirement planning frequently involves the objective of settling mortgage payments before entering the phase of post-employment life. The rationale behind this approach lies in the belief that managing expenses during retirement becomes more manageable without the burden of a mortgage, especially when relying on a fixed income.
However, the question arises: is completely paying off your mortgage always the optimal strategy? Some experts argue that allocating substantial financial resources to clear a home loan might have drawbacks. Surprisingly, there could be advantages to retaining a mortgage during retirement, such as leveraging interest payments for deductions on annual tax returns.
Nevertheless, this strategy may not be universally applicable. Crucial factors to consider include your mortgage interest rate, anticipated retirement income, and the extent of liquidity you are willing to forego to eliminate your mortgage. Assessing these elements is essential to determine whether paying off your mortgage before retirement aligns with your overall financial goals.