Looking for a Mortgage During the Retirement Years? Here's What to Know
Conventional wisdom says that you should aim to pay off your mortgage before your retirement years. Getting rid of this significant monthly payment will be a huge benefit when you need to scale down your living expenses in the golden years. However, this is not always a viable goal for every retiree. In addition, some retirees find it more beneficial to keep a mortgage around simply for tax deduction purposes.
Whatever the reason, there are cases in which you may be in the market for a mortgage even as a retiree. Unlike securing a mortgage during your working years when you have a steady income, finding a lender when you are no longer in the workforce can be more challenging.
Here are a few things to keep in mind when looking to qualify for a mortgage during the retirement years.
Know Your Rights
It is important to know your rights when you are considering applying for a mortgage. Under the Equal Credit Opportunity Act, lenders are not allowed to discriminate against potential borrowers simply based on age. All that you need to show as a retired borrower is that you have good credit, manageable debt, and enough money coming in each month to pay the mortgage bill. While demonstrating this proof of ongoing income may be more difficult if you are no longer working a consistent job, the lenders do not have the right to disqualify you just because you retired or are elderly. They also cannot push a shorter mortgage on you based on life expectancy.
Qualifying Based on Income
Despite being past their working years, the most common way for retirees to qualify for a mortgage is still based on income levels. Lenders will usually look at the previous two years of tax returns to determine a ballpark figure of income. Included in this number will be amounts from pensions, Social Security payments, stock dividends, and interest. While estimating income during the retirement years can be tricky, looking at the average over the last two years is generally the most helpful.
If your taxable income is not enough on its own to qualify you for the mortgage that you need, you can then offer up proof of financial security in the ways of 401(k) money or individual retirement accounts (IRA). By demonstrating a greater cash flow, you will prove to the lender that you have a steady stream of income from a variety of sources.
You can also potentially qualify for a mortgage simply on the assets in your retirement accounts. To figure this out, the lender will apply a formula of their own to the cash in the accounts to determine if it is enough to cover the mortgage payments throughout the entirety of the loan. Be aware that the lender will also likely want you to demonstrate that the distribution of your income and dividend sources will continue for at least three years. In other words, you need to prove that you are not already running out of money.
Applying For a Non-mortgage Loan
Another way to qualify for a new home during the retirement years is to apply for a non-mortgage loan. Through this avenue, you will pledge your assets by taking a loan against your personal brokerage account. This essentially makes you a cash buyer in the eyes of the home seller. Rather than obtaining a traditional mortgage, you are simply borrowing against yourself. This method is also usually a faster way to get into a new home because you avoid a lot of the hassle associated with mortgage paperwork. Most lenders will let you use up to 70% of your assets to finance a loan.
Some lenders will also allow retirees to count the cash value of a life insurance policy as a qualifying asset. However, if you are using the money to help to pay for the actual mortgage or the closing costs, the amount must be liquidated. Be aware that leaning on the cash value of your life insurance policy could mean a reduction in the policy’s death benefit.
The bottom line is that there is a multitude of ways that you can get creative with your mortgage qualification options during the retirement years. As with any major financial decision, it is important to carefully consider all of your options and their specific ramifications before proceeding.
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