How to Secure a Loan for a Retirement Home

A person’s retirement home is typically the last home they’ll purchase. While many people only begin to consider this real estate purchase/ownership as they head down the home stretch of their career, others begin to plan for the purchase of a retirement home much earlier – grabbing the advantage that additional time creates when proactively preparing for their retirement years.

With mortgage interest rates falling to historical lows (2.937% as of January 2021) – due to a confluence of an obstinate economy and a once-in-a-century pandemic, planning to buy a retirement home just became an even smarter idea. This is because a borrower can lock in these ridiculously low-interest rates for the next three decades, which would likely bring most to retirement age!

Securing funding for the home that will likely be the last home you will purchase should be a part of one’s long-term planning because any real estate purchase will use a significant part of one’s financial resources.

Fortunately, some tried, and true strategies may help in your quest to buy a retirement home. These retirement home purchase strategies are reviewed next.

Utilize the Equity Present In Your Current Home to Purchase a Retirement Property.

When nearing retirement, selling one’s home is the most common technique to raise capital when looking to purchase a property in which to retire. Whether it is to downsize or simplify one’s life & obligations, the sale of the home in which one raises a family often generates enough cash to buy a retirement home. This is especially true if the retirees are downsizing or moving to a more affordable location in the country, or perhaps, abroad.

However, it is noted that buying a retirement home for all cash may prevent a homeowner from securing some of the benefits created when opting to finance a portion of the purchase of the retirement home. Examples of these potential benefits include –

• The sheltering of taxable income. And while the 2017 Tax Cuts & Jobs Act reduced the deductible limits for home mortgage interest paid, there are still tax advantages and benefits to many homeowners who hold a mortgage on their primary residence.
• The maintaining financial resources (i.e., cash) that can be used for more profitable purposes when the opportunities present themselves.

Buy a Home That Can Be Used As a Second Home Until Retirement

Logistics aside, buying a property that can be used as a second home offers a win-win situation as the purchased property can be used for years by the entire family – before the owner hits their retirement years.

Also, it might be easier to qualify for a mortgage when working full-time in a career – as this income will likely be adjusted downward during one’s retirement years. But note, one’s income must be able to support both mortgage payments (for the primary residence and second home, simultaneously) if a lender is going to approve your mortgage application.

As economic conditions have shifted over the past few decades, those of retirement age have begun to carry debt in ways previous generations of retirees sought to avoid. According to CNBC (February 2020), the total debt for American borrowers – aged 70+ increased more than 500% between the years of 1999 to 2019. This significant increase in debt load was the largest of any age group tracked by the NY Federal Reserve Bank.

Securing financing for a second or retirement home is best accomplished by speaking with a mortgage professional to help sort through the detailed requirements and guidelines. If you are ready, you can apply online.

Qualifying for a Mortgage as a Borrower With Retirement Income

What About My Age?

One of the most common questions mortgage professionals are asked by retirees buying a home is –

Will I be able to get a 30-year mortgage because of my age?

The short answer is yes – because lenders are prohibited from denying a mortgage application simply based on an applicant’s age.  The credit decision is a function of the borrower’s creditworthiness, not the mortgage applicant’s placement within a set of actuarial tables.

The Equal Opportunity Credit Act (ECOA) prohibits lending institutions from discriminating when providing financing to various protected classes, of which age is one. The remainder of the federally protected classes set forth by ECOA includes race, religion, sex, color, national origin, and marital status.

The appropriate mortgage term – be it 5, 10, 15, 20, or 30 years, will be best determined based on the borrower’s finances, cash flow, and individual goals. For those who wish to minimize their monthly mortgage obligation, a 30-year mortgage loan is a great option. It allows for the prepayment of the outstanding balance without a penalty – for most mortgage products. A 15-year mortgage term may offer a lower interest rate but a higher monthly obligation for borrowers with a more robust cash flow.

It is critical to note that most retirees live on a fixed-income, which is unchanging by its very nature. As such, those who consider a mortgage in retirement are encouraged to select a fixed-rate loan, which, like a retiree’s income, is unchanging. This is especially true given the historical mortgage interest rates currently available.

How to Get a Mortgage Once You Have Retired

Obtaining a mortgage loan while retired requires an applicant to document how they receive retirement income. This can be tricky as retirement income is generated in a variety of ways that differ from typical employment income that is easily evidenced by a pay stub, a federal tax return (the 1040s), or a W2 form for most traditional workers.

Evidencing the Receipt of Retirement Income

Retirees, like any other borrower, must document they will have the income stream required to repay the mortgage loan as agreed. The income used to qualify for a mortgage loan must be consistent and verifiable. Retirement income can include:

• Social Security Income – which is evidenced by the provision of bank statements (showing deposits) or a Social Security Award letter, ­which is now obtainable online.
• 401Kor IRA (and other) Retirement Income Plans – these withdrawals are available from age 59 ½, and mandatory (Required Minimum Distributions – RMDs per the IRS) at age 72. The available time (of withdrawals) and consistency of the withdrawal will determine the mortgage applicant’s income.
• Pension Income – this income is similar to social security income and can be documented by consistent deposits into a bank account or the provision of an award letter.
• Rental Income – net rental income can be used to offset mortgage (and other debt) and, if positive, can be used as monthly income when qualifying for a mortgage. It’s important to note that depreciation is a non-cash expense that is added back to help a borrower qualify for a mortgage loan. Rental income is often documented by an executed lease, a consistent receipt of rental payments, and/or federal tax returns.
• A host of other options includes stocks, bonds, mortgages (as mortgagees), and annuities, to name a few.

For those borrowers who intend to purchase a home while retired (without the use of consistent employment income), it is a prudent idea to begin to set up a regular distribution of income from retirement accounts (as allowed by law) several months leading up to the submission of a mortgage application. An existing stream of income is helpful when qualifying for a mortgage loan as it evidences the income stream before the loan application.

Minimize Your Debt-To-Income Ratio to Allow for Easier Qualification

When applying for a mortgage – at any time, it is critical to highlight the strongest areas of your financial situation. In other words, it is best to apply for a mortgage when you have taken the time to do some financial housekeeping. This is best accomplished by minimizing one’s debt (mortgage, loans, credit cards, etc.) to where one’s monthly debt obligations are 43% of one’s total income – OR LESS.

The simplest way to reduce one’s debt-to-income ratio is to lower one’s overall monthly debt – without reducing one monthly income. This financial housekeeping should be done prior to applying for a mortgage, if possible. Bear in mind that the mortgage payment (as noted on the mortgage application) will also be included when calculating a debt ratio – which should not exceed 43%.

It is helpful to use an online mortgage calculator to help determine the varying monthly payments for different mortgage product options & loan amounts. This will provide some financial context for one’s ratio analysis.

Review Your Credit Report/Profile Before Applying for a Mortgage

With all three credit repositories required to provide a free credit report each year (as set forth by the Fair Credit Report Act (FCRA)), there are no reasonable explanations for anyone to be surprised by erroneous information that appears on a credit report during the mortgage process. This is because any misinformation should be reviewed and addressed each year by every individual who uses/needs to use credit. All three credit repositories – Experian, TransUnion, and Equifax, offer this service for free online.

The exact credit score required will depend on the mortgage product and/or lender, with most mortgage products requiring at least a credit score in the mid 600’s. However, certain government loans are more lenient concerning credit qualification, with FHA loans permitting mortgagors to have a credit score in the 500s, with an appropriate down payment.

Those with excellent credit scores – think 740+ – will have the most mortgage options when buying a home for retirement.

Plan For a Decent-Sized Down Payment

Most homebuyers intuitively know that it is easier to get approved for a mortgage loan as their down payment becomes increasingly larger. In fact, a large down payment often acts as a strong compensating factor for those borrowers with marginally high Debt-to-Income Ratios or credit scores that fall just below acceptable minimal levels for a preferred mortgage loan product.

Those choosing to get a jump-start when buying their potential retirement home can often tap the equity in their current home – by choosing to refinance or apply for a HELOC if the first mortgage terms are currently too impressive to revise). Borrowers can also use the capital available after selling their current home to purchase a retirement home.

Do Your Paperwork First To Make the Underwriter’s Job Easier

The documentation required to verify one’s income and assets for a mortgage underwriter can be overwhelming, depending on one’s financial scenario. The more thorough the documentation provided to an underwriter, the easier it is for this credit decision-maker to finalize their credit decision.

If you have any questions regarding how to document or verify retirement income, it is a prudent idea to speak with a mortgage professional who has walked this verification path before. Their experience can help reduce the stress and anxiety caused by not knowing how to appropriately verify legitimate retirement income.

The Take-Away

Choosing to finance a retirement home resembles the process of financing any other home, with the primary difference being how one verifies the receipt of one’s retirement income. For some, documenting one’s income in retirement is straightforward, while the task can be quite complex for others.

Either way, retirement is something to be celebrated, so congratulations for retiring – or preparing to retire. Landmark Mortgage Capital is here to help you sort out the details to help put you in your dream retirement home.