Getting a Mortgage in Retirement
October 6, 2022
Retirement is a phase of our lives that we all look forward to. It’s a time when we can finally relax and enjoy our hard-earned money without having to worry about working to make ends meet every day. Many people attempt to simplify their lives in retirement through a bare-bones schedule and sometimes by downsizing into a smaller home.
Buying a new house in retirement can be a great way to get the most out of your golden years, but one of the main concerns is getting a mortgage. Income is a huge factor when it comes to qualifying for a loan, and retirees may not have the same income as they did during their working years. So, can retirees get a mortgage? The answer is yes and here’s why.
Things To Consider When Getting a Traditional Mortgage For Retirees
The main factors that mortgage lenders consider when considering a borrower are debt-to-income ratio, credit score, and income. Although, retirees don’t receive income from employment anymore which can affect their ability to qualify for a mortgage.
The debt-to-income ratio is also an important factor for retirees. A mortgage lender will look at this ratio to see if the borrower can afford the new loan payments along with their other monthly expenses. As long as you meet the requirements, then you should be able to get a traditional 30-year mortgage in retirement.
When it comes to assessing income for retirees, lenders look at many different sources. This includes investment income, pension income, and social security income. Fannie Mae and Freddie Mac also allow retirees to use their assets to qualify for mortgages.
For example, 401(k)s and IRAs can be used to qualify for a mortgage if you can prove that you will receive income from these sources for the next three years or more. Since these retirement accounts are volatile along with the state of the market, most mortgage lenders only take into consideration 70% of the money in these accounts.
Credit rating is a way for lenders and banks to see how reliable borrowers are when it comes to paying their debts on time. There are credit score requirements that each lender has for their mortgages.
However, conventional loans typically recommend having a minimum credit score of 620 or higher. A higher credit score will usually result in a lower interest rate on the loan and makes it more likely that you will be approved.
A rule of thumb in the mortgage world is that the monthly mortgage payments should be no more than 36% of your monthly income. It’s also recommended that monthly payments on the house in total should be a maximum of 28% of your monthly income.
Overall, your debt-to-income ratio should be no more than 43% on the high end and no more than 28% on the low end.
Other Options Available For Retirees
There are many options for home buyers who are retired to get a new mortgage loan. Some options are made specifically for the retired demographic like the retirement home loan and others are made available to retirees if they are eligible.
The Equal Credit Opportunity Act protects borrowers from being discriminated against in any way, including age. This allows retirees to be eligible for mortgages as long as their credit score, income, and debt-to-income ratio meets the requirements of the lender. Here are a few of the mortgage options available for retirees.
Reverse mortgages are made specifically for borrowers over the age of 62 and older. Reverse mortgages can be a great option for those that need money as a last resort. To explain it simply, a mortgage is when someone borrows money from the bank to buy a home that someone else owns.
A reverse mortgage is when a homeowner has built equity in their property and wants to borrow that money to use as they please. When the borrower dies, sells the home, or no longer lives in the home, the bank repossesses the property and sells it to regain the money that was borrowed plus interest.
Home Equity Conversion Mortgage (HECM)
A HECM is the only reverse mortgage that is distributed by the Federal Housing Administration. The FHA reverse mortgage program allows borrowers to access a portion of their home equity without having to make monthly mortgage payments.
The borrower is still responsible for paying the homeowner’s insurance and property taxes monthly but not the loan itself until after they are no longer living on the property. To be eligible for a HECM you have to meet the following requirements and more…
- Be age 62 or older
- Be the owner of the property and have a majority equity
- Live in the property as your main residence
- Participate in a counseling session with an approved HECM counselor
- Not behind on any federal debt
Cash-Out Refinance Loans
Homeowners who have equity in their property and whose home has appreciated considerably also have cash-out refinancing as an option to buy a new home. With cash-out refinancing, your current mortgage is replaced with a new, larger mortgage (up to the current appraised value of the home) at a lower interest rate.
The new mortgage pays off the old one and the difference between them is given to you as cash. The bank is okay with this because they have your house, which should have been appraised at a higher value, as collateral.
However, you still need to pay closing costs with a cash-out refinance which can add up to thousands of dollars. Cash-out refinancing also tends to extend the length of your mortgage, meaning you will be paying on it for longer.
A Mortgage is Still Possible in Retirement
Who said retiring is the end of your homeownership journey? You can still buy a house in retirement if you follow the proper steps and do your research. Be sure to consult with a loan officer and/or a financial professional to get a clear picture of your overall financial health before you buy.
Also, don’t forget to factor in the cost of things like homeowners insurance, property taxes, and maintenance when budgeting for your new home.
Work With a Great Real Estate Agent When Buying a House
Homeownership is one thing but the home-buying process is a whole other animal. There are a lot of steps involved when buying a house.
From searching diligently for the right house for you to negotiating with the seller’s agent about the terms of the real estate contract, the process can take up a lot of energy and time.
Working with a good real estate agent is essential for home buyers because of their vast experience in real estate and their commitment to take on the headache of the home buying process so that you don’t have to.
However, not all real estate agents are good at what they do. Luckily, we have created a real estate organization that streamlines your search for a high-quality real estate agent otherwise known as a Negotiator.
Negotiators are real estate professionals that have all proven themselves to be top performers in their local real estate markets. Contact a Negotiator if you want to work with a great real estate agent.