How a retiree can qualify for a mortgage The Equal Credit Opportunity Act prohibits lenders from denying mortgages to retirees if all standard criteria are met. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Become a vital part of the SesameThrive community and share your experiences and insights. Annuity income can be used to qualify as long as the borrower can document that it is expected to continue for at least three years, said Joe Parsons, senior loan officer with PFS Funding in Dublin, California. “It’s an individualized situation. MassMutual, its employees and representatives are not authorized to give tax or legal advice. If you don’t receive monthly income from your retirement accounts, you might find a lender who is willing to qualify you through asset depletion – amortizing a portion of your assets and applying it as income. Few meet these exceptions, so the payoff option is the best bet.” Basically, this minority is those who are willing to invest in stocks an amount that is equal to or exceeds their loan amount. Furthermore, your mortgage payment alone (including taxes and insurance) cannot exceed a separate, lower percentage, generally around 28 percent of your income. When deciding if getting a mortgage when retired is a good idea, an individual of retirement age should know the answers to the following questions (some of these you may need to consult a financial professional): According to the Center for Retirement Research’s study titled “Should You Carry a Mortgage Into Retirement” paying off your mortgage is the better choice unless you “can earn a risk-free return that exceeds its mortgage interest rate; or cannot satisfy its demand for risky assets without borrowing money. Financial planners and mortgage lenders say, yes. Retirees often have significant assets, but limited income, so Fannie and Freddie have found ways to help retirees qualify based on their assets. It depends on their income, current mortgage payment, amount in savings, and whether or not the tax advantage of the mortgage interest is enough to counteract their expenses. But not all lenders are experienced in issuing mortgages to retirees. Check your eligibility for a retirement mortgage today. First and foremost, you need a great credit score. Itâs also having a huge impact on our financial wellness. These assets must be âentirely accessible to the borrower, not subject to a withdrawal penalty, and not be currently used as a source of income.â IRA and 401(k) assets must also be fully vested. They can provide paystubs and W-2s to document their income history, and they do not need to prove that their income is expected to continue at the same level for the foreseeable future. He could use the asset depletion method from his untouched 401(k) combined with the income he is already receiving from Social Security and his Roth IRA to qualify and borrow as much as possible. Lenders can only use 70 percent of the value of those accounts to determine how many distributions remain if the accounts consist of stocks, bonds, or mutual funds, since those assets can be volatile. Both are successfully self-employed, each in their own field. Fannie Mae also allows borrowers to use vested assets from retirement accounts for the down payment, closing costs, and reserves. For example, if a retiree is making 5% on their assets and they can qualify for a mortgage loan for 3.5%, plus get tax deductions, then a loan makes sense, says Doerge. College: Prep, acceptance, attendance, and after, Understanding life insurance: Types, terms and uses, Product/Fund Performance & Regulatory Documents, Modal Charge Disclosure and APR Calculator. Borrowers who derive income from such sources must document that it is expected to continue for at least three years after the date of their mortgage application. Government, education, healthcare, not-for-profit plans, By Amy Fontinelle Different lenders will probably assess your income and assets differently. You need to know the answers to how you’ll cover costs if inflation hits or your property taxes skyrocket, says Egermier. Sign up for our newsletter. Copyright © 2010 - 2020 Credit Sesame, Inc. | All rights reserved. Get started here. Ask how the lender qualifies retirement income and how they calculate qualifying income from assets, Fleming said. ). Consider a couple who sells their home to downsize and receives a chunk of cash from years of building up equity. – The amount of your down payment First and foremost, you need a great credit score. Before retiring, it’s a good idea to meet with a financial advisor and a loan officer to learn about your retirement mortgage options. Getting a loan, even when you aren’t retired depends on your income, credit history, amount of debt, and your assets. When purchasing a retirement home, many older people think that they cannot be eligible for mortgages. Get information and advice from a MassMutual financial professional near you. Heather Larson, a writer based in Tacoma, Washington, frequently writes about personal finance. Married couples applying for a loan together should consider how their spouseâs death would affect their ability to keep paying the mortgage. Others are OK with it, says Peggy Doerge, president of the Iowa Mortgage Association and vice president of senior underwriting at MidWestOne Bank. Patrick has been a lender since 1974. How would a disability affect my finances? For any mortgage, Fannie Mae instructs lenders to look for income that is â stable, predictable, and likely to continue .â For borrowers who work and earn a salary or regular wage, that requirement is easy to meet. 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. Each lender sets its own minimum, but expect it to be between 720 and 760. Get started with a retirement mortgage today. Conventional wisdom says homeowners should pay off their mortgage before they retire so they do not have to make a large monthly payment on a smaller income. https://www.creditsesame.com/blog/mortgage/can-i-get-a-mortgage-if-i-m-retired/, View Kimberly Rotter's posts and answers >, Creepy Credit Tales and Avoiding the Credit Score Scaries, The ‘golden rule’ can pay off—literally—when you’re a homeowner. Are you eligible for tax breaks that will increase your income? They are government-sponsored enterprises that buy mortgages from banks and home financing companies, provided those mortgages meet certain standards. The lender does not have to subtract closing costs if the borrower pays them from a different account; if John did that, he would have $1,805 in qualifying monthly income to put toward a housing payment. If the borrower is already using the asset, such as a 401(k), to receive retirement income, the borrower must demonstrate that they will continue to receive regular income from that asset for at least three years. The good news: Yes, you can. The way lenders view it varies widely. How much is PMI (private mortgage insurance)? Suppose John has $1,000,000 in his 401(k) and he has not touched it. That means that the total amount of money you are obligated to pay each month toward debt (including the mortgage you’re applying for) cannot exceed a certain percentage of your total monthly income. The retiree must also have unrestricted access to these accounts without penalty: for example, individuals usually cannot withdraw money from 401(k) accounts before age 59 Â½ without penalty. Fannie Mae lets lenders use a borrower’s retirement assets in one of two ways to help them qualify for a mortgage. How will your household income change if a spouse passes away. Indeed, lenders would be very hesitant to even broach the subject, Parsons suggested. Before spending too much time with a lender, would-be borrowers can ask a few screening questions to determine if they have the willingness and the know-how to handle their application. Regardless of whether the income has a defined expiration date, lenders require retirees to document the regular and continued receipt of their qualifying income using one or more of the following: letters from the organizations providing the income, copies of retirement award letters, copies of signed federal income tax returns, IRS W-2 or 1099 forms, or proof of current receipt. stable, predictable, and likely to continue, distributions from 401(k)s, IRAs, or Keogh retirement accounts, The Green Line report and your retirement, The Loan Guide: How to Get the Best Possible Mortgage, Long term care & life insurance combination. If you're at or near retirement and looking for a new mortgage, it might call for more preparation than any previous home purchases. Retirees can document this income using their award letter from the Social Security Administration and/or proof of current receipt. Lenders, however, cannot address this matter in the loan application. Find a great mortgage professional who can help you secure the loan that makes the most sense for your life and your finances. “One trip to the hospital can eat away at your savings.”. Few meet these exceptions, so the payoff option is the best bet. Though, qualifying for a mortgage with retirement income comes with specific requirements. Some people wouldn’t dream of having any debt when they retire. Most lenders weigh the same factors when considering your loan application: – Your credit score âItâs one of the advantages my clients have because I can generally get it done with the folks I send them to.â. These financial professionals should direct you to specific mortgage programs that are the best for your situation and ultimately help save you money. According to the Consumer Financial Protection Bureau (CFPB), 43 percent is the highest debt-to-income ratio a borrower can have to qualify for a mortgage (some lenders offer exceptions). The exact amount allowed, if any, is up to the lender. Job stability, even part-time, can help you qualify. John does not actually have to start dipping into his 401(k) to pay the mortgage, but this calculation shows lenders that he could rely on his 401(k) to pay the mortgage if needed to. however, we receive compensation when you click on links to products from our partners and get approved. Demonstrating proof of income may be different than it would be for working borrowers, but retirees who qualify can even take out a 30-year mortgage; lenders cannot base their decisions on an applicantâs life expectancy.