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Qualifying for a Mortgage in Retirement

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Technically, qualifying for a mortgage in retirement is no more difficult than qualifying for a loan at any other time. Whether you are 29 or 99, lenders still consider the same factors as anyone else to determine if you have the ability to repay a mortgage loan.

But for seniors who are no longer earning a regular paycheck, qualifying for a mortgage can pose some unique challenges. They can be overcome, and there are even some advantages to having nontaxable income sources when it comes to qualifying.

Special loan programs also exist if you are over 62 that allow you to receive income on your mortgage instead of making a payment.

Age is a protected class in mortgage lending

The Equal Credit Opportunity Act is a U.S. law that makes it illegal for a mortgage company to discriminate on the basis of race, color, religion, national origin, sex, marital status or age. Lenders cannot deny your application for a mortgage simply based on how old you are.

However, a person’s income is a key determinant of who will be approved for a mortgage. Lenders look at retirement income a little bit differently from other types of income, so you need to know the rules for which types of retirement income can be used for qualifying, and how to document them.

How different types of retirement income count toward qualifying for a mortgage

Your ability to qualify for a mortgage in retirement depends on a number of factors. You may be just getting Social Security income, or you may also be receiving a pension, IRA distributions or a combination of all of the above.

Understanding how the income can be used to qualify for a mortgage as well as the documents required to qualify will help you when applying.

Social Security

Once you begin receiving Social Security benefits, this income can be used to qualify. You only need to receive your first paycheck before closing.

You’ll want to keep a copy of your Social Security award letter, and if you’ve been receiving it for more than two months, provide copies of the most recent payment stubs. In many cases, Social Security is directly deposited into your bank account. If that’s the case, you’ll need to provide your two most recent months’ bank statements.

At the end of each year, you’ll receive a form 1099-SSA which is a Social Security version of a W-2. Be sure to keep copies of your 1099s just in case the lender asks for them.

Pension and retirement income

Always keep a copy of your retirement award letter once you receive it. Although your lender might not ask for it, an award letter usually verifies the beginning date for the income and how long it will last.

Just like with Social Security income, you’ll need to provide your most current bank statement to prove recent receipt of direct-deposited income, and 1099s for the last two tax years.

IRA, 401k and Keogh retirement distributions

If you’ve started taking distributions of retirement income, the lender will generally want to see a two-year history of receiving the income, and confirm that you have enough balance remaining to continue receiving the income for at least three years into the future.

You’ll also need proof of receiving the income the past two months and the last two years of 1099s, or some other applicable tax document verifying the receipt.

Social Security survivor benefits

If you are receiving income on behalf of a spouse that has passed away, the lender will need to verify if the benefit will be received for the rest of your life, or for a specific period of time.

Paperwork will be required verifying it will last a minimum of three years.

Disability income

If you are receiving disability income, the lender will need to verify the status of your disability, and confirm that the income will continue for at least three years into the future. If you have a disability award letter, or anything that states whether the disability is considered permanent or temporary, you should provide it to the lender.

Dividend and interest income

Income received from dividends or interest can be used to qualify with copies of tax returns for the last two years. A copy of the most current quarterly or two months’ statements will have to be provided as well to show the balance of the account the income is being earned from.

A two-year average will be used to calculate qualifying income.

You may notice a pattern of “two-year history and three-year future” in the above examples.  That is the standard for determining if the source of income is stable, and likely to continue.

How nontaxable retirement income helps you qualify

One advantage of having nontaxable income when qualifying for a mortgage is something called a “gross-up.”  When you have income from a regular job, lenders use your pretax income to qualify, even though you actually take home less income after your federal, state and Social Security deductions are taken out.

With nontaxable income, the fact that you don’t have any taxes withdrawn makes your take-home pay higher than it would be with taxable income. To compensate for this, lenders are allowed to add an extra percentage — called a gross-up — to your income to qualify for a mortgage.

For example, if you receive $1,000 of Social Security each month, and it’s nontaxable, conventional lenders allow a 25% gross-up. The lender adds this additional $250 to the base income and uses $1,250 to qualify you.

You may need to provide your most current tax returns to show your income wasn’t taxable, or get something from a tax preparer to verify you didn’t have enough taxable income to even need to file a tax return for the previous year.

Bank statement and asset depletion lending

Some retired people have complex tax-sheltered income that doesn’t easily translate to qualifying income for a mortgage loan under standard mortgage underwriting guidelines. For higher net worth retired borrowers, bank statement and asset depletion programs can provide an alternative to get approved for mortgage financing.

Bank statement lending

If you have a substantial flow of cash through your bank statements, but your tax returns are too complicated to show sufficient income to qualify, bank statement loan programs may be a viable option. Rather than using tax returns, the lender uses a percentage of your monthly deposits as qualifying income averaged over a 12- to 24-month period.

These programs require higher down payments, and the rates are more expensive than full income qualifying programs. Although fixed rates are available, the rates are substantially higher than the adjustable-rate mortgage options.

Asset depletion

If your Social Security and retirement income are not enough for you to qualify, you may be able to qualify by adding asset-based lending options. The concept is fairly simple — if you have a lot of liquid assets, the lender can divide those assets by the number of years you will have your new loan and count them as income.

For example, if you have a $250,000 savings account, and you are taking out a 30-year loan, the lender could divide the $250,000 by 30, giving you $8,833 of qualifying income. Although that’s only an additional $736/month of income, if you add it to your Social Security and retirement income, it might enable you to qualify for a house you couldn’t otherwise qualify for.

The drawback to bank statement and asset depletion loans is the rates and fees will likely be higher, and down payment requirements are more than standard purchase loan programs. In most cases, the lowest rates will only be available for adjustable-rate mortgages, which makes these types of mortgages a temporary solution — you should have an exit strategy for any type of loan like this.

The reverse mortgage option

If you are over 62 years old and have a significant amount of equity in your home, you may be eligible for a reverse mortgage, also known as a home equity conversion mortgage (HECM). The HECM program is offered by the Federal Housing Administration, but there are also a number of proprietary reverse mortgage options that allow for higher loan amounts than FHA.

One of the biggest benefits of the reverse mortgage is that no monthly payment is required.

The other benefits include the flexibility to create a stream of income, a lump-sum distribution of equity, a line of credit or a combination of all of the above.

You can purchase or refinance a home using a reverse mortgage, although the purchase option will require a much larger down payment based on your age and the property price. While there is no income qualifying requirement, lenders will need to determine that you at least have the means to pay the property taxes and insurance. Because you don’t have a monthly payment, the lender doesn’t create an escrow account to pay normal housing expenses.

It is important to understand that every month you have a reverse mortgage, the balance of your loan is growing, while equity is decreasing. You’ll be required to meet with a counselor to discuss how the program works and to determine if a reverse mortgage is the best option to meet your financial needs.

Mortgage scams that target retirement-age borrowers

According to a 2015 report on elder abuse, seniors lose $36.48 billion per year to financial scams. With baby boomers accounting for 36 million homeowner households in the United States, scammers are always looking for new ways to defraud them out of their housing wealth.

Reverse mortgage scams

Home repair: This one involves a friendly neighborhood contractor dropping by a home, with an ominous message that something is likely wrong with the home. The contractor offers to send a free estimate of what it would take to fix the problem before it becomes a life-threatening disaster.

Once the homeowner gets the estimate with a substantial repair costs, the senior is encouraged to take out a reverse mortgage to get “free money” to fix the home. The contractor is often involved with a disreputable reverse mortgage lender that tries to convince the customer that this is the only way to get the home repaired correctly.

Special government program: A real estate agent or lender may team up to pressure a senior to purchase a fix-up home using a HECM loan, telling them it’s a specialized government program only they have access to. In other cases, a person posing as a financial planner will suggest a homeowner use a reverse mortgage to pay off bills and invest in the market, rather than having the equity sitting in the home doing nothing.

Property tax reduction scam

In this scheme, a very official-looking notice is sent to look like it has been sent from a local assessor’s office regarding a program to reduce property tax by having the home reassessed.  The fee is usually very high, and the senior never sees any benefit or reduction, because a property tax appeal is something that can be done at no charge by any homeowner.

Wire fraud

While this is not exclusively a crime targeting seniors, the problem has become so widespread in real estate purchases, it merits an extra warning. The scheme usually begins with a hacker gaining access to the email of your real estate agent or the title company handling your closing escrow in a purchase.

An email goes out to you with instructions to send the money to a new bank, usually before closing, rather than on the date of closing. Once the money is wired, it is unrecoverable, and because a wire is a voluntary disbursement of funds from your account, your bank’s insurance will not cover the loss.

Always confirm wiring information by contacting the title company directly — the contact information should be in your purchase contract. Do not use the contact information in an email, as it may be a made-up number going directly to a person trying to defraud you.

Your safest bet is to wait wiring funds for your closing until you’re done signing your closing paperwork, and have been given the wiring instructions directly from the closing attorney or escrow agent face-to-face.

Final thoughts on qualifying for a mortgage in retirement

The thought of having no mortgage payment in your retirement years can be very appealing, if you’ve saved up enough for retirement to live comfortably. Unfortunately, according to a study by the Insured Retirement Institute, more than 40% of baby boomers have nothing saved for retirement.

Paying off the existing balance of your mortgage, or buying a new house using a big chunk of your savings doesn’t make much sense if it will leave you short of assets you could use to build up an underfunded — or in some cases, completely unfunded nest egg. Qualifying for a mortgage in retirement may make more financial sense in this situation than going into retirement mortgage-free.


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