How to get a home loan after retirement
There are unique challenges to qualifying as a retiree. Here’s how to prep for your home purchase. (iStock)
There are many reasons you might buy a home in retirement. It may be to downsize to a smaller house, purchase a vacation property, or just move closer to friends and family. Whatever the reason, now’s a good time to pull the trigger.
With mortgage rates at record lows (just 2.81% as of reporting), you could find yourself with a lower payment or, better yet, a bigger budget. Either way, you’ll want to prep before filing your application.
Good news: You can get started on the application entirely online. Multi-lender marketplace Credible can walk you through the process from start to finish. Get started by comparing current mortgage rates and lenders to see how you can save money and time.
How to get a mortgage once you've retired
Applying for a mortgage comes with some unique challenges once you’re retired. Here’s what you’ll need to do in order to qualify.
1. Illustrating retirement income
As with any loan, retirees will need to show they have the cash to repay the loan. Social Security payments, pensions, and IRA and 401(k) distributions can all help here. There is a caveat, though: It needs to be consistent, taxable income.
“The amount of money someone has is far less important to a lender than the regular income stream someone has,” said Cory Bittner, a retirement planning counselor at Falcon Wealth Advisors.
If you have a solid stream of income and can prove it, then you can get a jump-start on the mortgage application process today. Head to Credible to get prequalified within just minutes.
HOW MUCH MONEY DO YOU NEED TO BUY A HOME?
According to Bittner, a retiree living off a trust or simply withdrawing from a retirement account as needed probably wouldn’t qualify. A better option? That’d be setting up regular account distributions in the months leading up to their mortgage application.
“If I was retired and planned to buy a new home in the next three to six months, I may go ahead and start taking regular, static distributions from my IRA now to show a lender that's part of my income stream,” Bittner said. “From my experience, if someone has that income stream set and in place for at least three months before applying for a mortgage, that's helpful for their cause and helps make the application and qualification process easier.”
2. Reduce your debt-to-income ratio
Most mortgage lenders want to see a debt-to-income ratio of 43% or lower. This means your monthly obligations (loan payments, credit card bills, etc.) account for 43% of your monthly payments.
To calculate your DTI, just add up all your monthly debts — the ones that show up on your credit report — and divide them by your monthly income. Multiply by 100, and that’s your DTI. (Example: $2,000 in debts and $6,000 in income = 2,000 / 6,000, or 33%)
Keep in mind that your estimated mortgage payment will play into these calculations, too, so if your DTI is already inching up on 43%, you might need to pay down some debts before applying for your loan. You can use an online mortgage calculator to gauge what your mortgage payment may be.
You can also use Credible's free online tools to get an idea of your monthly mortgage payments and any other costs or savings.
HOW TO GET PRE-APPROVED FOR A MORTGAGE
3. Check your credit
The exact credit score you need will depend on your mortgage lender and the type of loan product you choose, but you can generally expect to need at least somewhere in the mid-600s. Though you could get approved with a score lower than that (FHA loans go down to 500 if you can make a 10% down payment), you’d probably get a less-than-ideal mortgage rate in that scenario.
In fact, if you really want to qualify for the market’s lowest interest rates, you’ll need to go much higher — think 740 and above. If you fall within this range, then you can start shopping for mortgages right away and see how much home you can afford.
If your score’s not quite there yet, take a few months to reduce your debts, make on-time payments, and correct any errors on your report. This could improve your credit score.
WHAT FACTORS AFFECT YOUR CREDIT SCORE?
4. Plan for a decent-sized down payment
The more you’re able to put down on the home, the less you have to borrow — and the lower the risk for the lender. That can mean an easier time qualifying or, in some cases, it could even make up for a lower credit score or higher DTI.
Be careful where you source your down payment, though. As Tyler End, the CEO of Retirable, put it: “Difficulties may arise when coming up with the cash for a down payment. If all of the assets are in a traditional IRA and they take out a large sum in one year, retirees can get hit hard on taxes.”
Technically, you only need a 3% down payment on a conventional mortgage and a 3.5% on an FHA loan. Going this low may make it harder to qualify, though.
HOW MUCH MONEY DO YOU NEED FOR A DOWN PAYMENT ON A HOUSE?
5. Get your documents in order
Finally, start gathering your financial documentation. Your lender will need this to assess how much you can afford, so be as thorough as possible. You’ll want to gather things like your most recent bank statements, proof of your last two Social Security payments, copies of IRA or 401(k) disbursements and statements for any brokerage or investment accounts, too.
Again, Credible can tell you step-by-step everything you'll need to provide. Plus, you can upload all the documents straight from your computer.
GETTING A SECOND MORTGAGE? HERE’S WHAT YOU NEED TO KNOW
Next steps
Once you’re ready to apply for your loan, you’ll need to shop around for your lender. Use a tool like Credible to compare several options and ensure you get the best rate and terms. You can then choose a lender, get preapproved, and start shopping for your home.
HERE'S A LOOK AT CURRENT MORTGAGE RATES
After you’ve found that dream home, you’ll need to fill out your lender’s full application, and submit the financial documentation gathered in step five. From there, your lender will order an appraisal of the home, and you’ll be given a closing date. That’s when you’ll sign your final paperwork, pay your down payment and closing costs, and get your keys.