How to qualify for a mortgage after retirement

To a lender, nothing is more important than income when they are considering whether to extend a loan. If you’re a retiree, don’t assume that living on a fixed income makes it is impossible to buy a home. The reality is you can still 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 you to buy a home without traditional income verification through pay stubs or W-2 forms. If you no longer earn a regular salary but can show adequate income sources like retirement savings, Social Security, or pensions, then you can apply for a retirement mortgage.

You may also still be able to get a loan with a lender who does not explicitly offer what they are calling a “retirement mortgage,” as lenders are willing to be flexible if you have other income sources and assets.

How lenders view retirement income

As you consider whether to buy a home, it is important to understand that lenders are more concerned about your ability to pay back your loan than they are about how much you earn. Financial investment company Fannie Mae instructs lenders to consider borrowers with dependable and predictable income.

The first step in deciding whether you can afford a home is assessing your income, and you may have multiple streams of income that contribute to your overall household budget, especially if you are retired.

Fixed income

As a retiree, you may have 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 do not put an end date on Social Security funds as long as you are drawing them from your work record.
• Pension: Lenders consider income from government or corporate pensions to be regular and consistent. You do not 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 run out. Lenders need proof that you will 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 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 do not 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 assets to afford a larger down payment, you also can consider a securities-backed loan. Your assets back these loans and give your lender the right to your stocks, bonds, and property if you do not repay. Like retirement accounts, lenders consider up to 70% of the value of assets that quickly fluctuate in value.

If you are looking for a good place to start for determining how much home you can afford, check out the mortgage calculator from Rocket Mortgage^®. This tool will show you a rough estimate of your monthly payment based on the amount of money you decide to borrow. It would be wise for you to consider playing around with the calculator to get an idea of how much you can comfortably afford to borrow with your income.

Debt-to-income ratio

Your lender will look closely at your debt-to-income ratio when you apply for a loan after retirement because you no longer have access to the full income you earned when you were working.

Your DTI ratio is the percentage of your monthly income that goes toward debt, and you can easily calculate it yourself by dividing your recurring minimum expenses by your total monthly income. For example, if you receive $4,000 a month from your fixed income sources and your debt and recurring payments equals $1,000, then your DTI ratio is 25%. To learn earn more about how to make this calculation, check out calculating your DTI ratio from Rocket Mortgage^®.  

DTI ratio is a critical risk factor that lenders consider when evaluating candidates for a mortgage loan. According to research, you are statistically more likely to default on a mortgage if your recurring debts take up a large percentage of your income and you therefore have a high DTI ratio. Since you might have a difficult time finding a loan with a DTI ratio higher than 50%, it is important for you to be proactive and take time to reduce your DTI ratio.

Lowering your DTI ratio

There are multiple ways to lower your DTI ratio. You can start a part-time job, a passion project, or seasonal work to increase your income. It would be in your best interest to consider paying down your smaller debts before you apply for a mortgage, and then adding your spouse or partner to your loan to increase your household income.

Credit

Increasing your credit score can increase your chances for a retirement mortgage, especially if you have a lower income or more debt. Having a high credit score helps you because it shows lenders that you are more likely to pay your bills on time and avoid borrowing too much money – giving you access to more lenders, more loan types, and lower interest rates.

Here are tips that you should consider to improve your credit score before you apply for a loan.

• Since it will increase your credit score, you should consider a secured credit card. These types of credit cards have low lines of credit and require a deposit to open. If you have an exceptionally low credit score, you are eligible for this card because it is low risk for lenders.
• Paying all of your bills on time is the fastest and most reliable way to improve your credit score, and you should consider turning on autopay to help avoid late payments that can lower your credit score.
• Consider not applying for any new lines of credit months before applying for a mortgage because it temporarily lowers your credit score.

Each lender requires a certain minimum credit score for loan qualification. If you qualify for an FHA loan, the minimum credit score with Rocket Mortgage is 580. For most other types of loans, you will 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, you will have an easier time qualifying. If you’re buying a second home, you may need to meet higher income, credit, and down payment requirements because you are statistically more likely to miss payments on your second loan if you run into a financial emergency. When ready, you should consult with your lender to learn more about what you need to qualify for a retirement mortgage.

The bottom line: Retiree income does not disqualify you from a mortgage

When applying for a retirement mortgage to buy a home, most lenders will consider pension, Social Security, and investment income as your regular income. They will consider your annuity, survivor, or spousal benefits and retirement account income as long as you can prove it will continue for at least 3 years. Even your assets can contribute to your ability to get a loan.

Improving your DTI ratio and credit score can increase your chances for a retirement mortgage. If you are seeking a mortgage loan for a primary residence rather than a second home, you may have an easier time getting approved.

Start the mortgage approval process online with the Home Loan Experts at Rocket Mortgage.