Can You Take Out a Mortgage After Retirement?

If you are a retiree, you might think that you won’t be qualified to take out a mortgage. But if you think so, you might be wrong. Because you can be qualified for a mortgage even if you have retired.

How does a Retired Person Qualify for a Mortgage?

According to the Equal Credit Opportunity Act, the lenders can’t disqualify you from taking out a mortgage on the basis of your age and whether you are working or retired. However, if you are retired, you will need to have a decent credit score and show a stable income to repay your mortgage on time.

So, here are some of the best possible tips that can help you to qualify for a mortgage after retirement.

Can you Get a Loan When you are Retired?

Usually, to qualify for a mortgage, you need to have a front-end ratio (percentage of your income that goes towards housing expenses) within 28% and the back-end ratio (percentage of your income that goes towards other debt obligations) within 36%. Let me show you an example.

Let’s say, your income is $5,000. So, the maximum amount you can dedicate towards mortgage repayment is $1,400 (= $5,000 0.28). And for all debt payments, the maximum amount you can contribute is $1,800 (=$5,000 0.36).

So, check whether or not your front-end ratio and back-end ratio are below 28% and 36% respectively. If not, you may not be qualified for taking out a mortgage. So, you can try paying off your debts as much as possible to reduce your DTI ratio. And thereby, you can qualify for taking out a mortgage after retirement.

Do you Have a Decent Credit Score?

Well, one of the mistakes to avoid in retirement is not taking care of your credit score once you leave the workforce. Many retirees have a preconceived notion that credit score doesn’t play an important role after retirement. But actually, it’s a misconception; a credit score is equally important after retirement.

If you want to take out a mortgage after retirement, the lenders will first check your credit score for loan approval. Besides, your credit score affects what type of mortgage you can opt for, what will be the interest rate, and how much you will have to pay for private mortgage insurance.

In most cases, you would require a credit score of 700 and above for taking out a mortgage at an affordable rate. However, every lender has their own guidelines regarding the credit score requirement. But if you don’t have a good credit score, you may not be qualified to take out a mortgage after retirement.

How do I Generate Income in Retirement?

You might think that after retirement, you won’t be able to show enough income to the lenders as you don’t receive paychecks now. But you can draw on your retirement savings to boost your income for approval to take out a mortgage. Here are a few ways that you can follow to show your post-retirement income:

1. Social Security income

If you have started receiving your Social Security benefits, you will be able to show this income to qualify. For that, you will need to show your Social Security order along with recent payment stubs if you have been receiving it for more than two months.

2. Drawdown from retirement method

In this method, if you are at least 59 ½, you can show recent withdrawals from retirement accounts as your proof of income. Retirement withdrawals with penalties (like 401(k) assets before age 59 ½) can’t be used as proof of income.

3. Asset depletion method

If you have limited income but significant assets, you can get qualified for taking out a mortgage by the asset depletion method.

In this method, the lenders determine the current value of your financial assets and deduct the amount that is required for making the down payment and closing costs. Then they find out 70% of the remaining value and divide it by 360 months. The resultant amount is added to your income to help you qualify for taking out a mortgage.

Make a down payment of a significant amount:

If you can make a down payment of a decent amount, you will have to borrow less. And it can help you to get qualified for taking out a mortgage. Because a lesser amount of loan means comparatively less risk to the lenders.

So, if you make a down payment of a significant amount, you may be able to take out a mortgage even if you have a low credit score or a high DTI ratio.

In our country, the minimum down payment on a home is 20% for most lenders. However, the minimum down payment of FHA (Federal Housing Administration) loans is around 3.5%. And some conventional loans like Fannie Mae HomeReady, Freddie Mac Home Possible, etc. require a minimum down payment of around 3%.

Talk to a lender:

Once you know that you are qualified for taking out a mortgage, start arranging your financial documents like Social Security income statements, bank account statements of the last three months, etc. Because you need to furnish these documents to the lenders to give you approval for the mortgage. The lenders might ask you for other proof of income too. So, it may take time for your mortgage loan approval to complete.

So, the bottom line is, you can be qualified for taking out a mortgage after retirement if you fulfill certain criteria like adequate credit score, DTI ratio, stable source of income, etc. But buying a new house after hitting your golden years may affect your nest-egg and you may fall short of funds. So, make sure that you are having enough income to make down payment and mortgage payments after retirement.

However, if you have not yet retired, you can talk to your financial planner and chalk out foolproof retirement planning so that you can take out a mortgage after retirement without any hassles.

Author Bio:

Phil Bradford is a financial content writer and an enthusiast. He has expert knowledge about personal finance issues and he is a regular contributor of Debt Consolidation Care. His passion for helping people who are stuck in financial problems has earned him recognition and honor in the industry. Besides writing, he loves to travel and read books.