Most people want to have their mortgage paid off before retirement, but that doesn’t mean that you can’t get a mortgage after retirement. All it comes down to is qualifying for the mortgage, just like you would if you were still working.
Keep reading to learn the qualifications to get a mortgage after retirement.
Qualifying Your Income
The hardest part of qualifying for a mortgage after retirement is qualifying your income. Lenders need income that is stable and predictable, such as a salary. Since you no longer work, that’s not an option. You don’t have W-2s and paystubs to show a lender. But there are still ways to verify your retirement income.
First, you must prove that your retirement income will continue for at least three years. Obviously, in reality you want it to continue much longer than that, but three years is the requirement for mortgage qualification. Lenders use a few different methods to qualify your retirement income:
- Asset depletion – If you have a large amount of invested assets, the lender can use 70% of that balance to qualify you for a mortgage. The lender would then divide that amount by the total number of months in the term (ex: 360 months). The result is your qualifying monthly income.
- Asset draw down – If you receive payments from social security or life insurance benefits, you must prove receipt of the income for at least two months. You must also have proof that the income will continue for at least three years with an award letter or letter of confirmation.
- Grossing up income – If you receive income that you don’t have to pay taxes on, the lender will ‘gross up’ your income. This means that they increase your qualifying income by 25%. This makes the qualification process similar to if you earned a salary. Lenders use your gross monthly income (income before taxes) to qualify you for the loan.
Meeting the Credit Score Guidelines
Each loan program has its own credit score requirements. The minimums we discuss below are the minimum credit scores for the actual program. Because Fannie Mae, the FHA, USDA, or VA don’t underwrite or fund the loans, lenders can have stricter guidelines. In other words, they must enforce the minimum guideline set by the loan program, but they can require a higher score if they want.
The minimum credit score requirements are as follows:
- Conventional loans – 680 credit score
- FHA loans – 580 credit score
- USDA loans – 640 credit score
- VA loans – 620 credit score
Meeting the Debt Ratio Guidelines
Each loan program has its own debt ratio guidelines. No matter the program, unless you apply for a subprime loan, you won’t be able to get a mortgage with a total debt ratio that exceeds 43%, as that’s the Qualified Mortgage Guidelines.
The program specific deadlines are as follows:
- Conventional loans – 28% housing ratio and 36% total debt ratio
- FHA loans – 31% housing ratio and 41% total debt ratio
- USDA loans – 29% housing ratio and 41% total debt ratio
- VA loans – 43% total debt ratio
Each lender may have their own requirements, though, especially if you qualify with retirement income. Some lenders may want lower debt ratios to make up for the riskiness of your retirement versus being employed.
Meeting the Down Payment Requirements
It’s typically in your best interest to make a large down payment so that you have equity in the home, especially if you are in retirement. But, each loan program does have minimum down payment requirements that you can follow. In general, loan programs require:
- Conventional loans – 5% down payment
- FHA loans – 3.5% down payment
- USDA loans – no down payment
- VA loans – no down payment
These are the typical down payment requirements. Because you are in retirement, though, you may see tougher requirements. For example, if you are trying to qualify with the asset depletion method (using invested assets), you will likely need a down payment as high as 30% to buy a home. If you use the drawn down method, though, you may get away with meeting the minimum program requirements. Just remember, you probably don’t want a 30-year term when you are in retirement – do you really want to be paying a mortgage when you are 90-years old?
Some lenders will have additional requirements or request that you have compensating factors to make up for the risk of you being in retirement. These could include:
- Having reserves on hand – Reserves are money you have set aside that is in excess of the money used to qualify you for the loan term. Reserves help the lender know that you can afford the cost of owning a home outside of paying the mortgage.
- Low debt ratio – Some lenders will enforce lower debt ratio requirements to make up for the riskiness of retirement income. Going into the mortgage with little to no debt can work in your favor.
- High credit score – Showing lenders that you are financially responsible and just don’t want to use all of your cash reserves to invest in a home right now can work in your favor too. A high credit score shows that financial responsibility.
Lenders cannot discriminate against you for your age, so you can get a mortgage in retirement. The trick is figuring out how you can qualify for it.