How to Get a Mortgage Once You Are Retired
Yes, You Can Buy a Home in Retirement
I frequently hear stories of upcoming retirees who, planning to move after retirement, locate a new home and take out the mortgage before retirement – because they think once they are retired they won’t be able to get a mortgage.
You don’t have to do it this way. You can get a mortgage once you are retired.
To find out the specific requirements, I interviewed Patrick Gavin, Branch Manager & VP of Mortgage Lending at Guaranteed Rate, the 10th largest privately held mortgage bank in the U.S Rate. Patrick has been a lender since 1974.
Let’s take a look at what I learned from Patrick about what it takes to get a mortgage once you are retired. I've broken things into 6 main categories below.
Determining Income for Retirees
Retirees assume that if they don’t have a paycheck, they won’t qualify for a mortgage due to lack of income.
In reality, lenders have two methods described below that they can use to calculate income for a retiree who is drawing on their assets.
Drawdown From Retirement Method
For retirees who are following a plan where they are now retired but may be delaying the start of Social Security or pension income, the most favorable option is doing to be using a “drawdown on assets” method of determining income. Here’s how it works.
As long as the borrower is 59 ½ the lender can use recent withdrawals from retirement accounts as proof of income. For example, assume recent bank statements show withdrawals of $4,500 per month from an IRA (the lender needs to see withdrawals for at least 2 months). This $4,500 would be considered monthly income. Sometimes the lender will need a letter from the financial planner or financial institution confirming these withdrawal amounts.
Asset Depletion Method
For retirees with a lot of invested assets, the asset depletion method of determining income may work well. With this method, the lender starts with the current value of financial assets. Then they subtract any amount that will be used for the down payment and closing costs. They take 70% of the remainder and divide by 360 months.
For example, assume someone has $1 million in financial assets. They are going to use $50,000 for a down payment. That leaves $950,000. Take 70% of that, which is $665,000 and divide by 360. The result, $1,847, is the monthly income used to qualify the borrower.
Of course any other sources of income such as pension income, Social Security, or monthly annuity income would also be counted in addition to income using the methods above.
Debt to Income and Housing Expense Ratios
Once income is determined, your total debt to income ratio and housing expense ratios must meet the lender’s requirements.
Debt to Income Ratio
For a Qualified Mortgage (QM) mortgage that falls within the safe harbor regulatory requirements no more than 43% of your income can go toward debt servicing. This ratio of debt payments to income is called the debt to income ratio.
Debt includes required payments like alimony and child support as well car payments, student loan payments, credit card minimum payments and your total projected house payment including principal, interest, property taxes and insurance.
One thing that can get retirees in trouble in this area is co-signing on loans for adult children. Even though you are a co-signer, those payments can count as required debt payments and may reduce your ability to qualify for a mortgage.
Housing Expense Ratio
Your housing expense includes the principal and interest portion of the mortgage as well as taxes and insurance (referred to as PITI). This ratio must be under 28% meaning your housing expense cannot exceed 28% of your income. PITI plus other debt obligations (credit card, child support, etc.) should be no more than 36%.
Credit Score Requirements
Each lender will have its own credit score guidelines, but one thing is for sure – the lower your credit score, the higher your interest rate. If you want the best rates, get your credit score to 780 or better.
A better credit score can also give you more wiggle room in other qualifying areas. For example, Patrick was working with a borrower who had a credit score over 780, and the lender made the loan even though the debt to income ratio was at 48%.
Another factor used to determine your interest rate on a mortgage is your intended occupancy. Will this be a primary or second home? Primary homes get better rates.
As a retiree, your required down payment can vary depending on the income method used. For the drawdown in retirement method, you can put as little as 5% down. For the asset depletion method plan on putting 30% down.
And if you’re thinking of coming up with your down payment by taking a big chunk of cash out of an IRA or another tax-deferred retirement plan I’d advise you to rethink this. That withdrawal will all be taxable income and taking a big chunk out in a single year may bump you into a higher tax bracket.
Another requirement will be the amount of post-closing liquid assets that you have available. Lenders want to see that you will have at least six months of total housing expense (PITI) as a minimum remaining reserve after you've bought the home. To calculate this, the lender will add up all financial assets that can be verified (meaning you need account statements) and then use 60-70% of that amount.
Other Lending Options
If you qualify as a veteran, you may want to look into a VA Loan. With a VA loan you can put zero down, but instead of a down payment you will pay a funding fee which can be 2.30% of the loan amount for first-time users of the program, and 3.60% if you have taken a VA loan prior. This funding fee can be financed into the loan.
VA loans require a debt to income ratio of 41% or less, and they require you to have some residual monthly income. If you have plenty of investment income residual income can be determined by taking a two year average of your dividend and interest income from Schedule B on your tax return.
Applying for a Mortgage
The best way to find out what kind of mortgage you can qualify for is to talk to a mortgage broker. Guaranteed Rate offers loans in all states and even has an online program they call Digital Mortgage where you can go through the entire process online.
You also want to do your due diligence on the house you are buying. For that, I’d recommend you check out HouseFax. It’s like a CarFax®, but for your house. I ran a HouseFax on my own property and luckily didn’t find any negative surprises, but I’ve heard of many people who have learned all kinds of interesting things about their property’s past through a HouseFax.
Should You Have a Mortgage in Retirement?
As we finished up our interview, Patrick said, “At the end of the day people ask me what the best mortgage is? My answer is none.”
Patrick is right. Research shows most retirees are better off paying off their mortgage before retirement.
A notable exception, however, would be higher net worth folks who may be able to use debt to their advantage even throughout retirement.
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Consumer Financial Protection Bureau. "What Is a Debt-to-Income Ratio? Why Is the 43% Debt-to-Income Ratio Important?" Accessed April 28, 2020.
Quicken Loans. "Alimony and Your Mortgage: How To Qualify." Accessed April 28, 2020.
Experian. "Debt-to-Income Ratio." Accessed April 28, 2020.
Minnesota Attorney General's Office. "Cosigning a Loan." Accessed April 28, 2020.
Century 21. "Housing Expense Ratio." Accessed April 28, 2020.
Experian. "780 Credit Score: Is it Good or Bad?" Accessed April 28, 2020.
Quicken Loans. "Primary, Secondary And Investment: What To Know When Buying Property." Accessed April 28, 2020.
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Union Bank. "Wholesale Lending At-A-Glance: Reserves," Page 1. Accessed April 28, 2020.
U.S. Department of Veterans Affairs. "Funding Fee Tables," Page 1. Accessed April 28, 2020.
Federal Deposit Insurance Corporation. "Home Purchase Loan Program," Page 73. Accessed April 28, 2020.
Guaranteed Rate. "Technology." Accessed April 28, 2020.
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