It is not unusual for retirees wanting to move after they stop working and buy a home. They think that once they actually stop working they will be unable to get a mortgage. This is not always true. If you meet the home loan requirements, you can get a mortgage when you retire. There are several home loan programs for retired borrowers available in 2023.
How to Buy a House after Retirement
Securing a mortgage post-retirement is feasible, with many prerequisites mirroring those required during one’s working years—such as maintaining a solid credit history, a stable income, and a favorable debt-to-income ratio. However, certain aspects of the qualification process may differ, particularly in how income verification is handled.
You Can Retire and Still Buy a Home and Qualify for a Competitive Mortgage Loan
Below is more information about how to qualify for a mortgage if you are retired.
How to Determine Income for a Retiree
Retirees might think if they have no income, they cannot get a mortgage. But lenders have other ways to calculate income besides an actual job. The first is the draw down from retirement method. This is for the retiree who is following a plan where they are retired but might not be using their Social Security or pension income yet. The best way to handle this scenario is to do a draw-down on assets.
As long as you are 59.5 years old, the lender can use withdrawals from your retirements accounts as your proof of income. For instance, if you have bank statements showing $4,500 in withdrawals each month from your IRA, this would be considered your monthly income. The lender might need a letter from your financial adviser to confirm how much you have been withdrawing.
Another way is the asset depletion method. This is for the retiree who has a lot of assets invested in the markets. With this method, the mortgage lender starts with the value of all financial assets. Then, they subtract any amount that is used to pay the down payment and closing costs. Then, they will take 70% of the remaining assets and divide it by 360 months. So, if you have $1 million in assets and use $50,000 for a down payment, you have $950,000 left. Seventy percent of that is $665,000 and divide by 360. The monthly income you get is $1847 to qualify you.
Also, other sources of income can be used by the lender, such as real estate investment income, Social Security, monthly annuity income, etc. All of this counts as monthly income, too.
Validating your income for mortgage qualification post-retirement involves considering diverse income sources such as Social Security, a 401(k), Roth IRA, or a pension. Although these avenues generate income, certain sources are deemed finite due to their depreciating nature. Lenders typically require evidence that there is a sufficient amount in these accounts to ensure a consistent income for a minimum of three years. Generally, lenders permit the inclusion of income from Social Security, trust distributions, and other assets in the calculation of your qualifying income.
Debt to Income Ratios
After you have determined your monthly income, your debt to income ratio and housing expense ratio needs to be evaluated. For a qualified mortgage, you should have no more than 43% of your income going to debt payments. This is your debt to income ratio.
Debt includes payments for cars, credit cards, child support, student loans, as well as your mortgage payment.
A problem you can run into is cosigning loans for your adult children. Those payments will count as part of your required debt payments and could affect your ability to get a mortgage.
Regarding housing expense ratios, this includes your principal and interest part of the mortgage and insurance and taxes; this is called PITI. The ratio must be under 36%. This means it cannot be more than 36% of your gross monthly income.
Every lender has guidelines for credit scores. The lower your score, the higher your rate will be. If you want the lowest rate, make sure your credit score is above 740. A better score can also help you to qualify in other areas. For example, if you have a credit score over 780, you may be able to get a loan even though you have 49% debt to income ratio. Find out what credit score is needed for a home loan today.
It also matters where you intend to live. Is this home going to be your primary or second home? If it is your primary home, you get better rates.
If you are retired, you can have various down payment requirements depending upon how your income was measured. For drawdown in retirement, you can put down only 5%. If you are doing the asset depletion method, you will need to put down 30% in some cases.
If you want to take the down payment out of your IRA, this will be considered taxable income and may put you into a higher tax bracket.
Other Financing Options
If you are a retired veteran, you could look at a VA loan. You will not have to put any money down and will enjoy very low rates. VA loans do require a debt to income ratio of 43% usually, and you should have some monthly income. If you have a lot of investment income, your residual monthly income can be figured by taking a two-year average of interest and dividend income from your tax return on Schedule B.
How Does the Home Loan Qualifying Process Change When Buying a Retirement Home?
The remaining stages of the homebuying process will closely resemble those for individuals still in the workforce. This entails making an offer on a property, meeting the qualifications for the mortgage, and participating in the closing proceedings. It is advisable to collaborate with a lender who possesses expertise in dealing with retirees. Such a lender is well-versed in the various options for qualifying for a loan and can provide guidance on the available mortgage alternatives.
Generally, financial experts recommend not having a mortgage in retirement, but if you have a higher income, you may be able to use that debt to your financial advantage. Just be sure that you can afford those payments, as you may qualify for more mortgage than you need.