If you are a retiree and do not have a regular job anymore, you may think that it will be impossible to get a mortgage. Some people get a mortgage a year before they retire so they can get the loan while they still have a regular job. But it is not necessary to buy a retirement dream home this way. Some people can buy a home after they are retired. Below is how to do it.
How to Determine Income for Retirees
Retirees don’t usually have a pay check. So, they think they cannot qualify for a mortgage because of a lack of income. But in the real lending world, lenders can use two ways to determine what your income is if you do not have a regular job.
The first way is called the drawdown from retirement method. This is for the retiree who is following a plan where they are retired but could have delayed starting to get Social Security or their pension. As long as you are 59.5 years old or older, the lender may use your recent withdrawals from your retirement accounts as your proof of income. For instance, if your bank statements show you take out $4500 each month from your IRA, this would be part of your monthly income. You need to show at least two months of withdrawals. The lender could need to see a letter from the financial institution to confirm that this much has been taken out.
The other way to show income without a job in retirement is for the person with a lot of assets invested. This is the asset depletion method. With this method, your lender will start with the value of all assets. Then they will take out any amount that can be used for the down payment and the closing costs. Then, they will take 70% of what is left and divide by 360.
For instance, if you have $1 million in assets and you use $50,000 for your down payment, you have $950,000 left. You take 70% of that; this is $665,000. That is then divided by 360. The number is $1847, which is what you use to qualify. Any other income you get from Social Security or annuities or real estate will be counted as well.
After you have figured out what your income is in retirement, your total debt to income ratio must be determined. The debt to income ratio or DTI should be no more than 43% of your monthly income going to servicing debt. This is your DTI.
Debt includes your payments for cars, credit cards, student loans, house payment, property taxes and insurance. Note that one problem area for retirees is co signing for loans for your adult children. These payments could be counted as debt payments and can hurt your ability to qualify for the loan.
Another factor is your housing expense ratio. This is the amount of your mortgage, principal and interest, also called PITI. This ratio needs to be below 36%.
Every lender has different credit score standards. The lower your score, the higher your rate will be. To get the top rates, you want your credit score to be 780 or more. If you have a very high score, this will give you more possibilities to get approved if you have weaker parts of your application. For example, you have a high credit score, you may get away with having a higher DTI than the typical maximum.
Another thing they will consider on getting your loan in retirement is if you plan to live there all the time or only as a second home.
When you are retired, how much you need for a down payment will vary based upon the income method the lender used. For the drawdown method, you may put down just 5%. For the asset depletion method, expect to need to put down 30%.
Another thing you need to know is how much post-closing assets you have available. They will want to see that you have six months of housing expenses as a reserve when you buy the home.
The bottom line is it is very possible for many retirees to get a mortgage to pay for their dream home. If you have enough assets or income coming in from other sources besides a regular job, you should be able to get some type of mortgage. It is okay to have a mortgage in retirement if you are sure that you can really afford it with your income and/or assets.