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Are you thinking about a new living situation in retirement? Maybe you've always dreamed of moving to a smaller town, or downsizing to a pied-a-terre in the city with no lawn to mow and fewer bathrooms to clean. But even scaling down might require financing. For example, if you're moving from a $1 million home with a $600,000 mortgage to a $500,000 home, you still need a cool $100,000 mortgage to make the transaction work.
Can you get a mortgage after you've retired? Thanks to the Equal Credit Opportunity Act (ECOA), you can. The ECOA restricts lenders from discriminating on loan applications based on age, so being retired won't prohibit you from getting the funds you need. Getting approved for a mortgage in retirement can be tricky, however. Here's what to know about securing a home loan when you're retired from work.
Qualifying for a Mortgage in Retirement
To get a mortgage in retirement, you'll meet the same basic requirements you would for any mortgage.
- Down payment: You'll provide a percentage of the purchase price upfront as a down payment on your home loan. Your down payment reduces the amount of loan you need in addition to helping you qualify for the loan.
- Credit score: Although mortgage options exist for a range of credit scores, the higher your credit score, the better your loan's rate and terms will likely be.
- Debt-to-income ratio (DTI): To help determine how likely you are to default on a loan, lenders look at how much of your income goes to housing costs and paying down debt. You can estimate your DTI by adding up your mortgage payment or rent, credit card payments, car payments and personal loan payments, and dividing them by your gross monthly income. The lower your DTI, the better your chances for loan approval.
Your down payment, credit score and DTI should help you and your lender determine how much house you can afford. As an additional step, you might want to try getting preapproved or prequalified for a loan before you begin the house hunting process. Going through a preapproval should help you uncover any obstacles—and give you time to resolve any issues that arise. You'll also get a clearer sense of how much mortgage you can expect, so you can plan accordingly.
Key Considerations When Getting a Mortgage in Retirement
For many retirees, the biggest challenge to securing a mortgage is income. Your monthly income may be lower in retirement than it was during your working years, and you may need to work a little harder to document it on a loan application.
Proving Your Income
When you're retired, you may be living on a fixed income with multiple income sources, including Social Security, pensions or government income, 401(k) or IRA distributions, investment dividends and bank interest, veteran's benefits, long-term disability income, wages from part-time work or capital gains, business income or income from rental properties. Be prepared to document each source of income on a loan application.
Here's a quick list of documents you may need.
- Letters confirming benefits or payments
- Benefit or account statements
- Bank statements showing deposits
- Signed federal tax returns for at least two years
- W-2 or 1099 forms
- Recent pay stubs
In some cases, you may also need proof that income will continue for at least three years. Your lender can provide details on the exact documentation you'll need.
Finding the Right Program
If you have substantial assets but your documented income is low, an asset depletion mortgage might help. With this type of loan, the lender divides your eligible assets by the number of months in the mortgage to impute monthly income. Say you have $1 million in qualifying assets and want a 30-year loan. The lender would divide $1 million by 360 to get $2,777.78 in monthly income to help you qualify.
If you have regular income that isn't documented on your tax returns, a bank statement loan might work for you. You provide 12 to 24 months' worth of bank statements showing regular deposits instead to prove income on your loan application.
Asset depletion and bank statement loans aren't available from every lender. If you're interested in these options, you'll need to do some investigative work online or with a mortgage broker.
Getting a Home You Can Afford
You may also want to flip your perspective around and think about how much home—and how much mortgage—you can ideally afford based on your qualifying income, backup assets and lifestyle. Even if you can secure a large mortgage, you may not want to take on a giant house payment for the next 15, 20 or 30 years.
Think through your options. Can you downsize or move to a less expensive community? Can you shorten your loan term so you don't have to continue paying for quite as long? Being flexible may help ensure you end up with a long-term solution you love.
4 Ways to Improve Your Chances of Approval for a Mortgage in Retirement
Here are a few steps to consider if you're contemplating a mortgage.
1. Optimize Your Credit
A high credit score can help you get approved for a loan and secure the best rates and terms possible. For retirees, who've had decades to establish and maintain good credit, this can be a place to shine.
However, it's always a good idea to check your credit score and report before starting the loan application process. You may find you need to pay down existing debt to improve your credit utilization ratio—and help your credit score.
2. Maximize Your Down Payment (and Minimize Your Loan)
Another advantage retirees may have is equity. If you've lived in your current home for years, you may have substantial equity you can apply as a down payment on your next home. Putting more money down helps you minimize your loan amount, which can make your new loan easier to qualify for—and afford.
At the same time, many experts advise against depleting your retirement savings to cover the cost of a new home when you're in or nearing retirement. Doing so will decrease the income you need to qualify for a mortgage and could worsen your financial position going forward.
3. Consider Getting a Loan Before You Retire
If you know you want to move to a more affordable home in retirement, but you're still working and bringing home paychecks, you may want to make the transition now. You may have an easier time applying for a loan while you're still employed. As a bonus, you'll have time to adjust to your new surroundings before making the leap to retirement.
4. Work With a Mortgage Broker or Advisor
Because getting a mortgage in retirement can be a bit more complex, you may benefit from working with a mortgage broker or advisor who's experienced in retirement mortgages. They can help you determine whether getting a new mortgage is feasible—or desirable—for you, and help you find mortgage programs that fit your needs.
The Bottom Line
Getting a mortgage in retirement is possible, but it's also a big step. You may want to talk your ideas over with a financial advisor first to make sure you're considering all of your options. If you're in the planning stages, now may be a good time to check your credit score and credit report, so you know where your credit stands as you move forward.