In a perfect world, homeowners would have their mortgage paid off long before they hit retirement age. This is ideal, as a hefty monthly mortgage payment can take a sizable chunk out of a fixed income. However, not all living situations end up like this. Regardless of the reason for a retiree to still hold a mortgage, the question arises whether or not it is possible to even qualify for a mortgage after retirement.
Why Retirees May Have a Mortgage
Some retirees find they still need to make a mortgage payment out of necessity, perhaps relocating in order to be closer to their grandkids or family. However, some may find it more beneficial to sell their home and purchase another of lesser value but use the liquidity from the first home to make a larger retirement investment. This way, the money grows for the larger purpose of retirement while their fixed income is able to keep up with the current mortgage demands. Others take advantage of low mortgage refinance rates in order to save money on a monthly payment while still making additional investments. Whether out of necessity or in order to save, it is possible for someone who is retired to quality for a mortgage.
How Retirees Can Qualify for a Mortgage
The Equal Credit Opportunity Act requires lenders to be impartial when determining lending approval, forbidding discrimination based on age. Though retirees are generally within a certain age bracket, lenders look at additional factors when offering a loan. Age has nothing to do with the consistency of income to pay off a potential loan and the credit history behind the borrowers. There are different elements of proving proof of income, but so long as borrowers can demonstrate or provide sufficient evidence of their creditworthiness and to the bank’s satisfaction, retirees can qualify for a mortgage. While the life expectancy may indicate that a 30-year mortgage isn’t a strong likelihood, lenders are not allowed to factor this into decision-making.
Where Retirees Get Their Income
Income needs for a mortgage should be predictable, stable, and likely to continue. Those who are still working tend to easily meet this requirement. W-2s and paystubs are offered as proof of income history, though there is no additional burden of proof that income levels are expected to remain consistent for the lifetime of the loan. With retirees, lenders must look at a combination of income sources and the limits or expected ending of these sources. Distributions from retirement accounts, IRAs, and 401(k)s have an expiration date, as the amount of money is depleted with each issuance. Lenders must only look at 70% of the value in these accounts.
Borrowers also need to have their income documented that there is a three-year expectation of payout. Distribution must be able to remain for at least three years from the date the mortgage is issued, but it must also be documented that the borrower is able to draw on these accounts without penalty and without restriction. Social security income doesn’t have an expiration date, but there is still a three-year payable expectation date that must be documented. An award letter from the SSA or a current receipt of issuance can be used as proof.
Some lenders allow borrowers to use retirement assets in order to aid in qualifying for a mortgage. The sale of a business, lump-sum distributions, and retirement plans can be used to help them qualify. Borrowers receive the same rates and terms as those who aren’t retired, but there may be more consideration on the length of repayment if the borrower wants to avoid a lengthy contract. There are still fees for arranging and closing the loan, and the borrower is still responsible for paying applicable insurance costs and property taxes.
Retirees are still able to purchase homes and obtain mortgages, even though their income sources may not be traditional. Each lender will have specific criteria that must be met, making it important to do your research before assuming you will qualify for a loan.