How To Qualify For A Mortgage After Retirement

Your income is one of the first things that lenders look at when they consider whether to extend you a loan. Many retirees assume that if they live on a fixed income, it’s impossible to buy a home. However, the truth is that you could buy a home without a job as a retiree as long as your income meets your lender’s standards for a retirement mortgage.

What Is A Retirement Mortgage?

A retirement mortgage enables retirees to buy a home without submitting traditional income verification like pay stubs or W-2 forms. The approval process for these loans caters to retired individuals who may not have a regular salary but can show adequate income sources like retirement savings, Social Security or pensions.

You may still be able to get a loan with a lender who does not explicitly offer what they’re calling a “retirement mortgage,” as many lenders are willing to be flexible on W-2s if you have substantial other income sources and assets.

How Lenders View Retirement Income

There is no set dollar amount you need to have to buy a home — lenders are much more concerned about your ability to pay back your loan than they are about how much money you earn. Financial investment company Fannie Mae instructs lenders to look for borrowers with dependable and predictable income. While working borrowers can prove their income with a W-2, you might have a bit more trouble proving that you have a stable income if you don’t work. However, it’s possible to combine your sources of income and still qualify for a retirement mortgage.

The first step in deciding whether you can afford to buy a home is assessing your income. If you’re retired, you may have multiple streams of income that contribute to your overall household budget.

Fixed Income

As a retiree, you may have several sources you use to contribute to your overall income. Lenders have unique viewpoints on different types of fixed income.

• Social Security: Lenders view these payments as your primary source of income during retirement. They don’t put an expiration date on Social Security funds as long as you’re drawing them from your own personal work record.
• Pension: Lenders also consider income from government or corporate pension to be regular and consistent. You don’t need to prove that your pension income will continue if you include it in your application.
• Spousal or survivor’s benefits: Mortgage lenders consider spousal support or survivor’s benefits as limited sources of income because these payments will eventually run out. Lenders therefore require proof that you’ll receive payments for at least 3 years. 
• Retirement accounts: You can use income from a 401(k), Roth IRA or another retirement account to qualify for a loan by proving that payments will continue for at least 3 years past the mortgage date. Most lenders will only regard 70% of the account’s value due to market volatility.
• Income from investments: Any income you receive from dividend- or interest-producing assets can support loan qualification. You don’t have to prove this income will continue unless you draw income from an asset that diminishes over time.
• Annuity income: You can use annuity income in your calculations as long as the annuity is set to continue. You must prove that your annuity payments will continue for at least 3 years after you take out your mortgage loan.

Assets

One issue that many individuals run into when they decide to buy a home is that they have most of their money tied up in assets. While you can sell off some of your assets to put a larger down payment on your home purchase, you can also consider a securities-backed loan. Your assets back these loans and give your lender the right to your stocks, bonds and property if you fail to repay. Like retirement accounts, lenders may only consider up to 70% of the value of assets that can quickly fluctuate in value.

If you’re looking for a good place to start to determine how much home you can afford, check out the mortgage calculator from Rocket Mortgage^®. This tool shows you a rough estimate of your monthly payment based on the amount of money you borrow. Play around with the calculator to get a rough idea of how much you can comfortably afford to borrow considering your income.

Debt-To-Income Ratio

Once you retire, you don’t have access to the full income you earned when you were working. This makes you a riskier candidate for a mortgage loan. Your lender might look particularly closely at your debt-to-income ratio when you apply for a loan after retirement.

Your DTI ratio is a formula that looks at the percentage of your monthly income that goes toward debt. Lenders usually look at your DTI ratio as a percentage. You can calculate your DTI ratio by dividing your recurring minimum expenses by your total monthly income. For example, if you receive $4,000 a month from fixed income sources and your debt and recurring payments equal $1,000, your DTI ratio is 25%. Learn more about calculating your DTI ratio.

Interpreting Your DTI Ratio

The higher your DTI ratio, the riskier you are as a candidate for a mortgage loan. If your recurring debts take up a large percentage of your income, you’re statistically more likely to default on a mortgage. If you have a DTI ratio higher than 50%, you might have a difficult time finding a loan.

Lowering Your DTI Ratio

You can lower your DTI ratio multiple ways. You may want to consider picking up a part-time job, passion project or seasonal work to increase your income. You might also want to focus on paying down some of your smaller debts before you apply for a mortgage. Finally, you may want to add your spouse or partner to your loan to increase your household income.

Credit

You can also increase your chances of getting approved for a retirement mortgage by increasing your credit score. Your credit score is a three-digit number that represents your reliability as a borrower. If you have a high credit score, you’re more likely to pay your bills on time and avoid borrowing too much money. On the other hand, if your score is lower, it might be because you frequently miss bill due dates or put too much money on your credit cards.

If you have a lower income or more debt, you can improve your ability to get a loan by increasing your credit score. A higher credit score also gives you access to more lenders, more loan types and lower interest rates.

Here are a few tips that you can use to improve your score before you apply for a loan.

• Pay all of your bills on time. The fastest and most reliable way to improve your credit score is to pay all of your loans and credit card bills on time. Consider turning on autopay to help avoid accidentally lowering your score.
• Consider a secured credit card. Secured credit cards have low lines of credit and require a deposit to open. If you have a very low credit score, you’re eligible for this card to increase your numbers because it’s considered low risk for lenders.
• Limit your credit inquiries. If you’re getting ready to apply for a mortgage, don’t apply for any new loans or credit cards a few months beforehand. Applying for a new line of credit temporarily lowers your score, which can hurt your chances of getting a loan.

There’s no set credit score you need to buy a home. Each lender sets its own credit standard. If you qualify for an FHA loan, you might be able to buy a house with a score as low as 500 points (The minimum credit score with Rocket Mortgage is 580 for an FHA loan). For most other types of loans, you’ll need a score of at least 620.

Does Property Type Impact Retirement Mortgage Eligibility?

The type of property you buy will influence how easy it is to qualify for a retirement mortgage. If you want to buy a primary residence (a home you live in for most of the year) you’ll have an easier time qualifying. If you’re buying a second home, you may need to meet higher income, credit and down payment requirements. This is because if you have more than one mortgage loan, you’re more likely to miss payments on your second loan if you run into a financial emergency. Consult with your individual lender to learn more about what you need to qualify for a retirement mortgage.

The Bottom Line

Buying a home with a mortgage as a retiree can be more difficult than buying a home with standard employment income. Most lenders consider pension, Social Security and investment income as your regular income. You may also be able to include your annuity, survivor or spousal benefits and retirement account income as long as you can prove it’ll continue for at least 3 years. Your assets can contribute to your ability to get a loan. 

You can make up for a lower income with a better DTI ratio and credit score. You may also have an easier time getting a mortgage loan for a primary residence over a second home.

If you’re interested in learning more about the mortgage approval process, get started with Rocket Mortgage.