If you’re in retirement and considering buying a home, you might think that if you’re not getting a paycheck, you won’t get a mortgage.
Okay, stop right there. And say it with us: You can still get a mortgage when you’re retired. Retirees buy and refinance homes every day. In fact, you may be able to use your nest egg to qualify for a new mortgage.
Whether you’re working or retired, getting a mortgage depends largely on three main things: your assets, your income, and your credit history.
Use your assets to boost your retirement income
If you want to draw on your retirement savings to create more income to get approved for a mortgage, there are two options that lenders use: the drawdown from retirement method and the asset depletion method.
Drawdown from retirement method. If you’re retired but delaying the start of Social Security or pension income, you may be able to use the drawdown from retirement method of determining income.
As long as you’re at least 59½ years of age, a lender can use recent withdrawals (at least two months’ worth) from your retirement accounts as proof of income. You may need a letter from your financial institution or financial planner that confirms the withdrawal amounts.
Asset depletion method. For retirees with a lot of invested assets, the asset depletion method of determining income may work well.
In 2011, Freddie Mac started allowing lenders to consider retirement account assets to help retirees qualify when applying for a mortgage or refinance. With this method, the lender determines 70% of the current value of your financial assets, subtracts any amount to be used for a down payment and closing costs, then divides the remaining amount by 360 months. That amount is then added to your monthly income to help you qualify for a mortgage.
For example: If you have $500,000 of eligible assets, 70% of that is $350,000. After subtracting $7,500 in closing costs, you have $342,500. That amount divided by 360 is about $951.39, which can be added to your monthly retirement income to help you qualify.
The catch: With asset depletion, you’ll need a down payment of at least 30% if you're buying a new home, or at least 30% equity if you’re refinancing. This helps Freddie Mac manage the risks of making this option available.
Gross-up your non-taxable income
Non-taxable income goes further than earnings that are subject to income tax, and lenders recognize this. Fannie Mae’s guidelines, for example, state that lenders “should give special consideration to regular sources of income that may be non-taxable.”
Lenders are allowed to increase non-taxable income for qualifying purposes by 25 percent. So if you receive $1,000 a month in Social Security income, your application should state an adjusted income of $1,250. And if your tax bracket is higher than 25 percent, lenders are allowed to gross-up your non-taxable income even more.
Note: You must prove that the income is non-taxable. That might involve supplying tax returns plus an insurance policy, account statement, benefits award letter, or other documents that prove the tax status of the income.
Keep a high credit score
Every mortgage lender has its own credit score guidelines. But they all follow the same policy: The lower your credit score, the higher your interest rate. Want a better rate? Get, and keep, a higher credit score.
A better credit score may also help if you have less-than-ideal numbers in other areas, like a high debt-to-income ratio (see below).
Some additional things to consider
- Know your ratios. Your total debt-to-income ratio (no more than 43%) and housing expense ratio (no more than 36%) must meet a lender’s requirements.
- Is your new mortgage for a primary or second home? This will affect your interest rate. (Hint: Primary homes get better rates.)
- Thinking of refinancing in retirement? While rates have crept up recently, they’re still near historic lows. If you have an older mortgage with a higher rate, now may be the time to look into a refi.
- If you’re a veteran or a family member of a veteran, you may want to look into a VA Loan. There’s no down payment required, it allows for less-than-perfect credit, and you may be able to refinance up to 100% of your primary home’s value.
- If you’ve co-signed loans for your adult children, payments on those loans can count as your required debt payments and may reduce your chances of qualifying for a mortgage.
- Retirees do not receive higher rates than working folks. Rates are the same for everyone, regardless of employment status.
- Lenders cannot qualify or disqualify you from a loan based on your age.
Getting a mortgage in retirement is different, but it doesn’t have to be difficult
The world is changing, and more people are getting mortgages after they retire. A great way to find out what kind of mortgage you can qualify for in retirement is to talk to a ditech Home Loan Specialist. And if you haven’t bought a home in a while, be sure to check out our cheat sheet on homebuying in today’s market.
Ditech is not a financial advisor and the ideas outlined above are for informational purposes only. They are not intended as investment or financial advice and should not be construed as such. Consult a financial advisor before making decisions regarding important personal financial matters, and consult a tax advisor regarding the deductibility of interest and tax implications.