Many times, when people retire, they decide they want to relocate. Many times, these people opt to find a new home and take out a mortgage prior to retirement because they are afraid that once they retire, they won’t be able to qualify for a mortgage. This couldn’t be further from the truth. It is possible to get a mortgage after retirement. In this article, we’ll take a look at which financing options are best for retirees.
Determining Retiree Income
Many retirees believe that since they don’t have a paycheck to show their income that they won’t qualify for a mortgage. However, lenders actually have two methods that can be used to calculate income for retirees drawing on their assets.
Drawdown from Retirement
The most favorable option for retirees that are following a plan where they are retired but delaying Social Security or pension income, is the “drawdown on assets” method. Here’s how it works:
As long as the retiree is 59.5+, lenders can use retirement account withdrawals as proof of income. For example, your bank statements show $4,500 withdrawals per month from your IRA for at least 2 months. This withdrawal from your account is your income. In some cases, your lender may request a letter from your financial institution or financial planner to confirm the withdrawals.
Some retirees have a lot of invested assets. In this case, the asset-depletion method may work well. The lender starts with the current value of financial assets and subtracts whatever is going to be used for the down payment and closing costs. Then, they take 70%of the remainder and divide it by 360 months.
For example, let’s say your assets are worth $1 million. You plan to use $50k for a down payment. This leaves you with $950k. The lender then determines what 70% of that is ($665k) and divides that by 360. Therefore, the monthly income that would be used to qualify you as a borrower is $1,847.
Of course, if you have any other sources of income, such as a pension, Social Security, or monthly annuities, it would be counted as income in addition to the income determined by using the methods above.
Debt-to-Income & Housing-Expense Ratios
Once your income has been determined, it’s time to look at your total debt-to-income, or DTI, ratio and your housing-expense ratio to make sure they meet the requirements of the lender.
According to financial experts, no more than 43% of your income can go towards your debts. This is your debt-to-income ratio. It needs to be under this in order to qualify for a mortgage.
Debt encompasses things such as:
- Child support
- Car payments
- Student loan payments
- Minimum credit card payments
- Total projected house payment (principal, property taxes, insurance, and interest)
One of the things that can cause complications for retirees in this area is when they co-sign on loans for their adult children. Even as a co-signer, these payments can count against your DTI, reducing your ability to qualify for a mortgage.
Your housing-expense ratio includes the principal and interest portion of your mortgage, as well as the insurance and taxes. This is also referred to as the PITI. Lenders don’t want your housing expense to exceed 28% of your income. Therefore, your PITI along with other debt obligations should be under 36%.
Credit Score Requirements
When it comes to credit scores, each lender has its own guidelines. However, there’s one thing that they all have in common: the higher your score, the lower the interest rate you will qualify for, and vice-versa. Therefore, if you want the best rates, you need a score of 780 or higher.
Another factor that lenders use to determine your interest rate is the occupancy status of the property. You will be asked if it will be your primary home or secondary. It’s important to note that a primary home will get a better rate than a secondary home.
Down payments for retirees can vary, depending on the method of determining income that was used. If the drawdown method is being used, you can put down 5%. On the other hand, if you are using the asset-depletion method, you will need to expect to put 30% down.
If you’re considering coming up with your down payment by taking out a chunk of your IRA or another tax-deferred retirement plan, understand that this will be considered taxable income and could throw you into a higher tax bracket.
Another thing the lender will expect is that you have up to six months of total housing expenses in reserve after buying the home.
Which Home Finance Options are Good for Retirees?
If you’re getting ready to retire and want to relocate to Florida, especially the Kissimmee area, contact Solivitia Living. We are a real estate agency specializing in 55+ communities. We can help you find the right home, in the right community, so you can have the retirement you deserve!