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Mortgage And Retirement

Some people who enter retirement assume one of two things; once you retire, you can’t get a mortgage or you should not have a mortgage in retirement. 

Below we’ll cover the benefits of owning a home and having a mortgage in retirement, the different ways of obtaining a mortgage even in retirement, and your mortgage options.

Benefits Of Owning A Home And Having A Mortgage In Retirement

Owning a home after you leave the workforce is an important part of your total financial plan for retirement. Here are the benefits of owning a home in retirement.

Benefits Of Owning A Home And Having A Mortgage In Retirement:

  • You earn equity – As you pay off your mortgage, you own your home or parts of it and can tap into that equity. Whether you want to make home improvements, supplement your retirement income, or take a dream vacation, the equity is there for you to use it whether with a reverse mortgage or traditional loan. 
  • You can earn passive income – If you move out of your home, but own it, consider keeping it. You can earn passive income by renting the home out and supplementing your retirement income, decreasing the money you withdraw from your 401K and IRA. 
  • Low cost of living – When you own your home (especially without a mortgage), you have fixed expenses. You know what to expect, don’t have to worry about increasing rents, and can manage your predictable budget easier. 
  • Tax benefits – We all want to do whatever we can to decrease our tax liability and owning a home is one of the best ways. You can write off the interest paid on your mortgage, real estate taxes, and certain home expenses (especially energy-efficient expenses). If you’re in a high tax bracket in retirement, owning a home is a great way to reduce the liability and keep more money in your pocket
  • You can age where you want – Many people want to stay in their home as they age – they don’t want to move into a retirement home or with family. When you own your home, it’s easier to stay put. You are comfortable there, know the expenses, and can bring in any healthcare support you need into the privacy of your own home.

As you can see owning a home is an important part of retirement for many retiree’s.

retired homeowners

How to Qualify For A Mortgage In Retirement

Once you’re done working, you might assume your options for getting a mortgage in retirement are limited.

Can I Qualify For A Mortgage On Retirement Income?

Yes. Having qualified retirement income won’t stop you from getting a mortgage. Mortgage lenders have many ways of qualifying a borrower on retirement income. Pension, Social Security, IRA/401 etc., and Investments income can all be used to qualify. Lenders also alternative options for those with little retirement income.

Meeting The Requirements

If you can demonstrate that you have enough money to cover the payments with your retirement income and you meet other qualifying factors, such as credit score and debt-to-income ratio requirements, you’re on your way to having a mortgage in retirement. 

Here’s what you’ll need to qualify. 

Income Requirements:

Here’s the tricky part – your income. Lenders look at your total monthly income based on the method you receive it. If you receive regular monthly checks, you’ll use the drawdown method and if you have invested assets, the asset depletion method is best. 

Social Security:

If you receive Social Security income then that can be used to qualify for a mortgage. In some cases, your income can be “grossed up” for income calculation purposes. For some programs, it’s 15% and for others, it’s 25%.

“Grossing Up” Income – The Mortgage Reports has great example of what this is;

Some kinds of income are not subject to taxes — for example, child support and disability. In that case, lenders are allowed to count that income as worth more. Usually, non-taxable income is worth 25 percent more for mortgage qualifying. So, $1,000 a month in child support counts as $1,250 a month. They call this practice “grossing up” income because you’ll actually have more after-tax income.

source: themortgagereports.com

Pension Income

Pension income is also another easy way to get qualified for a mortgage in retirement. If you receive Pension income you’ll be asked to provide a 1099, a benefits statement and two months of bank statements showing the Pension income being deposited.

IRA and 401k – Drawdown Method:

If you receive regular retirement checks from a retirement account (IRA, 401k etc.), you can use the proof of receipt to qualify for a mortgage. 

It’s like proving your work income – you show the lender the money you bring in and they compare it to your debts and the potential new mortgage. 

Asset Depletion Method:

In some cases, lenders can use the asset depletion mentod.

Lenders use the total (current) value of your portfolio and ‘deplete’ it over the term whether 360 months, 180 months, or some other term. They’ll first deduct any down payment and closing costs you’ll pay out of it, and then they’ll use 70% of the value to account for taxes and penalties, dividing the remainder by the total term. 

Additional Requirements To Consider

Two additional requirements to consider are Debt-to-Income Ratio and underwriting credit score requirements.

Debt-to-Income Ratio: 

Lenders must make sure you can afford the loan within your current income along with any existing debts. For example, if you have credit card debt or a car loan, it takes up some of your income and leaves less for a mortgage payment. 

Most lenders want to see a 43% debt-to-income ratio which means no more than 43% of your income should be committed to your debts. This leaves enough money to cover the daily cost of living, savings, and money to cover any emergencies. 

In some cases the debt-to-income ratio can go as high as 50%.

Credit Score Requirements:

Just like when you were employed, the higher your credit score, the better your rate and terms. In retirement, you want the lowest interest rate to keep your monthly payment down, and keep your total loan costs low. 

Every lender differs but aim for at least a 680+ credit score. If you aren’t sure what your credit score is, check it on one of the free sites, like Experian or Credit Sesame. They don’t provide the exact FICO credit score lenders use, but it’s as close as it gets. 

Down Payment:

If you’re buying a home, you’ll need a down payment. 

The mortgage program you choose determines how much of a down payment you need. For example, FHA loans require just 3.5% down and conventional loans may require 5% or more. The more money you put down though, the more equity you’ll have, the lower your mortgage payment will be, and the less interest you’ll pay over the life of the loan. 

You can get almost any type of mortgage in retirement, whether you are buying a home and need a purchase mortgage, or you own a home and want to tap into the equity. Lenders today offer cash-out refinance and home equity loan options, making it easy to use your home’s equity. 

Types of Mortgages

The two main types of mortgages are Conventional and FHA. Additional types include VA and USDA.

Conventional Mortgage:

Under Conventional mortgages, you have Conforming and Non-Conforming loan programs. Conforming loan programs are loans that adhere to the Conforming loan limits of Fannie Mae and Freddie Mac. 

Non-Conforming loans are loans that have loan amounts that go above the Conforming loan limits.

FHA Mortgage:

The Federal Housing Administration (FHA) allows for retired homeowners and homebuyers to access the FHA home loan program. FHA loans are backed by the federal government and require Mortgage Insurance (MI).

30-Year Fixed Mortgage:

The most common mortgage for homeowners in retirement is the 30-year fixed mortgage. It has a rate and payment that never change. Also the payment is lower than the second most popular program, the 15-year fixed.

15-Year Fixed Mortgage:

Like the 30-year fixed mortgage, the 15-year fixed mortgage has a rate and payment that never change. The problem with the 15-year is that your monthly payment is significantly higher which means your dedicating more of your monthly income to your mortgage payment.

That being said, some homeowners are fortunate enough to retire early and would still like to payoff their mortgage. If that’s the case then you may want to consider a 15-year mortgage provided the monthly payments are low enough.

Alternative Option

A standard mortgage or home equity loan is a great way to tap into your home’s equity if you already own a home, but need some of the money you’ve earned in it, but there’s another way too. 

It’s called a reverse mortgage. 

It’s still a mortgage, as the name suggests, but it’s the opposite of a traditional mortgage. A reverse mortgage allows access to your home’s equity, but you don’t have to make payments. 

The ‘reverse’ part means you don’t owe any money until you leave the home (sell it) or pass away and your heirs sell it. 

A reverse mortgage can be a way to supplement your retirement income. Qualifying for a reverse mortgage differs greatly from a standard mortgage. 

  • Both or all borrowers must be at least 62 years old 
  • You should own the home without a mortgage or owe only a small amount 
  • You must prove you can afford the home upkeep, insurance, and taxes to qualify 
  • You can’t have any defaults on federal loans 

The writers over at Investopedia provide a simple explanation as well;

What Is a Reverse Mortgage? 

In a word, a reverse mortgage is a loan. A homeowner who is 62 or older and has considerable home equity can borrow against the value of their home and receive funds as a lump sum, fixed monthly payment or line of credit. Unlike a forward mortgage—the type used to buy a home—a reverse mortgage doesn’t require the homeowner to make any loan payments.

source: investopedia.com

With a reverse mortgage, the lender tells you how much you can receive. The amount varies based on the age of the youngest borrower and the amount of equity in the home. The older you are when you take out a reverse mortgage, the more money you’ll receive as lenders base it on your life expectancy when you take the mortgage. 

You can receive money from your reverse mortgage in several ways: 

  • Lump-sum – You can receive the entire amount of funds at one time. 
  • Term – You receive a set payment every month for a specified term. 
  • Tenure – You receive monthly payments for the duration of your time in the home (or your life). 
  • Line of credit – You receive a line of credit that you can access funds from as needed. 
  • Modified term – You receive a set payment for a specified term and the remaining funds go into a line of credit. 
  • Modified tenure – You receive monthly payments during your time in the home and the remaining funds go into a line of credit. 

The reverse mortgage gives you access to your home’s equity without having to worry about monthly mortgage payments. If you want to keep your income for your current expenses, a reverse mortgage may be just what you need. 

Should you Have a Mortgage in Retirement?

For many the answer to that question is yes.

If you have the rest of your debt under control, meaning you aren’t in over your head in high-interest consumer debt, a mortgage shouldn’t take up too much of your retirement income. 

And with a mortgage, you’ll have a larger nest egg to which you can access as needed. Before making a decision you should consult your Financial Advisor, research your options and then make an informed decision that meets your financial goals.

Loan Officer Kevin O'Connor

About The Author

Loan Officer Kevin O'Connor has over 16 years of experience as a Mortgage Loan Originator and is licensed with the state of California and the Nationwide Mortgage Licensing System. He has a top rating with the Better Business Bureau, Google, Yelp, and Zillow. CA DRE #01499872 / NMLS #247447

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