It may seem like a nearly impossible idea to get a mortgage after retirement, but there are ways you can get around it even if you are not employed. If you’re planning to apply for a mortgage, here are 5 common questions you might ask that we’ve answered for you:
1. What will lenders consider as my income?
Income from a regular or part-time job
Brokerage account or retirement savings
Transfer payments like Social Security and pension
Household income (income from non-borrowing household members)
2. How will lenders compute for my income?
If you are not employed, there are methods that lenders will use to compute for your income. Take note that if you receive transfer payments, those will be included in the computation for your income in both of these methods.
Asset depletion method: If you have a lot of invested assets, the lender will compute for their current aggregate value and will subtract the amount for the down payment and closing costs. 70% of what remains will then be divided to 360 months.
Drawdown from retirement method: If you’re at least 59 ½ years old, you can use documents or receipts that verify your recent withdrawals from retirement accounts.
3. What are the factors that affect the approval of my mortgage?
Aside from the above, your other financial details will also be subject to the lender's scrutiny
Credit score: The typical requirement of lenders for a credit score is usually 780; a score that's higher than that can increase your chances of getting approved. And if you ever fall short on other factors, such as debt to income ratio, a good credit score just might save your application. But if your score is higher than that, you will probably get a higher interest rate.
Debt to income ratio: Your debt is comprised of car payments, credit card minimum payments and your total projected house payment which includes interest, principal, property taxes and insurance. Other things like alimony and child support are also included in it. The debt to income ratio is expressed in percentage and is computed by dividing your total monthly debt by your gross monthly income. The safe percentage among lenders is not going beyond 43%, but maximum DTI still varies per lender. The ideal is 36%, and with no more than 28% going into paying the mortgage.
House expense ratio: Your housing expense ratio is the sum of your housing payments such as the potential mortgage principal and interest payments, property taxes, mortgage insurance, hazard insurance, and association fees. It’s computed by dividing the sum of those by your pre-tax income. Just like the DTI, it is expressed in percentage and is ideally not exceed 36% of your income.
Post-closing liquidity: Lender would also want to see your available liquid assets after closing, and they usually require that you at least have assets that could cover for at least 6 months worth of housing expense. This is calculated by adding up all of your verified financial assets and then subtracting the closing costs and equity for the loan.
4. How much is the usual down payment?
The amount of down payment you would have to give is dependent on the method used for determining your income.
5. What are my other options aside from getting the usual loans in the market?
VA loans: If you’re a veteran or a military spouse, VA loans offer 0 down payment and low interest rates. You can read more about this here(link to VA loans article)
Reverse mortgage: Also known as the Home Equity Conversion Mortgage (HECM) for purchase program, it is a kind of loan that can delay repaying for the mortgage (principal or interest) until the house is sold or the death of the borrower.
Here are some tips for when you’re getting a mortgage after retirement:
Buy one for your primary residence, since those that will be used for vacation or investment will get higher interest rates.
If you can, make extra mortgage payments. If you can afford to pay more than what the lender computed for, you can arrange to have the monthly payment increase. This can shorten the time you would have to pay for the mortgage and could decrease your monthly payments over time.
If you plan to take out a hefty amount of cash for the down payment from IRA or another tax-deferred retirement plan, take note that you might be placed in a higher tax bracket.
Know about consequences to inflation hits or a great increase in your property taxes. You also have to consider having a financial contingency plan should there ever be medical emergencies, or a price increase in your health insurance. Take these into account and get an estimate if you can still cover for it on top of your mortgage.