After retirement, you may need a mortgage to relocate, downsize, or ultimately buy your ideal house. Those on a fixed income may struggle to qualify for a mortgage. Creditworthy homeowners may still buy a new home using money from retirement accounts and other assets instantly at Oak.
If you’re retired and contemplating a mortgage, start here.
- Determine Your Credit Score
If you’re nearing retirement, you probably have a solid credit history. Lenders favor consumers with credit scores of 620 or above. Check your credit score before applying for a mortgage. Knowing your score ahead of time allows you to enhance it.
How to check your credit score:
- Visit the credit bureaus
- Visit a free credit score website.
- Credit monitoring tools from your credit card issuer
- Seek a non-profit credit counselor.
- Decide on your retirement income.
The income of a homebuyer is also considered when applying for a mortgage. Lenders want two years of evidence to evaluate a mortgage application. If you retired two years ago, you must present Social Security, pension, dividend, and interest income proof.
You may also depend on your retirement or other assets to generate a monthly income in two ways:
- Retirement drawdown For retirees without Social Security or pension benefits, a “drawdown on assets” technique is preferred. Borrowers over 59.5 may use retirement withdrawals as evidence of income. A retired purchaser decided to withdraw $5,000 from just an IRA every two months.
- Asset loss. Add the current worth of your financial assets and deduct the amount you expect to spend for a down payment or closing fees. Finally, divide 70% of the remaining value by 360 months to compute monthly mortgage payments.
3. Compute Total Housing Costs
Mortgage principal and interest, taxes, and insurance (PITI). But it might also include upkeep, utilities, and HOA fees. After retirement, your PITI must be less than 28% of your total income to get a mortgage.
Consider a $900,000 property in a gated neighborhood with monthly HOA costs of $100. The monthly PITI payment for a $720,000 mortgage (30 years at 3.5%), $500 in property taxes, and $300 in property insurance is $4,033.12. Monthly living costs would be roughly $4383.12, including HOA fees, utilities, and lawn care.
4. Debt-to-income ratio
The monthly debt payments are compared to your gross monthly income. TO FULFILL THE SAFE HARBOR REGULATORY GUIDELINES, a QM must have a DTI of 43% or more minor. Borrowers must have a DTI of 36% or less to qualify for a mortgage. There are other online DTI calculators, but the basic equation is as follows:
Monthly Debts/Monthly Gross Income
Include PITI, alimony, child support, student loan, automobile, and credit card minimum payments when determining DTI. Also, remember that co-signing for adult children’s loans may affect your DTI and your ability to secure a mortgage after retirement.
5. Consider Property Type
You may be able to get a mortgage after retirement, provided you choose the right house. Qualifying for a loan is more straightforward if you intend to mortgage your main home, where you spend most of the year.
Alternatively, a second property (such as a summer cottage) may be more difficult to finance if your main home is already mortgaged. In this case, you’ll need a more significant down payment to fulfill stricter income and credit standards.
6. Getting a Mortgage
If you’re ready to buy a home, consult with your existing lender or a financial institution knowledgeable about your circumstances. If your current lender isn’t competitive, check around for one that is. When looking for a lender, inquire about any hidden fees like mortgage insurance and discount points that might be added to your loan.
Use preapproval to find out what sort of mortgage you could qualify for. Mortgage preapproval may help you set realistic expectations while looking for a property and a lender. It can also help you impress sellers when making an offer.
Preapproval may also speed up the application and approval process by allowing you to easily access personal information like credit score, income, and assets.
Traditional mortgage down payment choices are limited for retirees. Depending on how you calculate your monthly income, you may only need to put down 5% of the buying price. However, asset depletion-based revenues may be closer to 30%.
Traditional down payments may be made from an IRA or other tax-deferred retirement plans, but these withdrawals are taxable.
Alternative Financing Options
If you can’t get a typical mortgage, you may be able to borrow against your non-retirement brokerage account. This avoids income limitations and makes your offer more appealing to sellers. The lender determines how much you may borrow against an asset’s worth. Clients of Schwab, for example, may borrow up to 70% of their qualified assets.
However, keep in mind that these loans often have shorter periods (five years or less) and higher interest rates than mortgages. If you follow this route and wish to decrease your monthly payment or speed, you’ll need to refinance.
Should You Retire With a Mortgage?
In retirement, you should not have a mortgage. Large monthly mortgage payments are tough to afford without consistent income. The money is often used to satisfy mortgage payments rather than conserving it for future living costs.
A mortgage payoff before retirement isn’t always feasible or prudent. You may lose your emergency fund if you use enormous savings, retirement assets, or other investments.
Similarly, excessive withdrawals from some investment accounts might result in significant tax consequences and fines. Investing your money rather than spending it to pay down your mortgage may also yield you a greater rate of return.
Ultimately, the choice to retire with a mortgage is a personal one. So, before you sign a mortgage or use retirement funds as a down payment, talk to a financial expert.