Many retirees consider relocating, whether for a place with better amenities, fewer taxes, or a lower cost of living. If you are considering doing this, it is important to think about how you will finance your purchase. Securing a mortgage in retirement is not always as easy as you might think. On the one hand, the pandemic has made many lenders more hesitant to give out loans, including mortgages, which means the minimum requirements may be slightly higher than normal. On the other hand, most retirees no longer have a steady paycheck and, if they do, it is likely quite small compared to what it was prior to retirement. Even with a lot of money saved, it can be difficult to qualify for a mortgage with little income.
Qualifying for a Mortgage When You Are Retired
The specifics of qualifying for a mortgage once you are retired will depend on both the lender and the type of loan you are seeking. If the mortgage is backed by Fannie Mae or Freddie Mac, there are strict guidelines for qualifying. Private mortgage lenders will have their own standards that need to be met. In general, however, all lenders will look for the same key points, such as your credit score and other forms of debt. As already mentioned, income is also an important factor, even for retirees. After all, you will need to have enough monthly income to cover your mortgage and living expenses. If you are retired, you will need to strategize to ensure your income puts you over the line for the mortgage that you want.
To figure out your income, lenders will typically look at the prior two years’ worth of tax returns. Your tax return in retirement should account for income from Social Security, pensions, dividends, and interest. However, your taxable income is largely under your control, which is where qualifying for a mortgage gets tricky for retirees. If you have a 401(k) or an individual retirement account (IRA) you draw from, you need to think critically about how your distributions look on paper. As you prepare to apply for a mortgage, you may need to strategize to make your income appear larger than it actually is. In other words, you may need to take more distributions than you need for your monthly expenses.
If you are at least 59½ years old, you can tap into a 401(k) or IRA without any sort of early-withdrawal penalty. Also, it is important to note that you will be able to put the cash back within 60 days of the distribution and not pay any taxes in the process. Outside of 60 days, however, you would have to pay taxes on the money, which is important to keep in mind. Even if you return the money, the lender will see the income reflected on your bank statement. You can take larger distributions for a couple of months to make your monthly income appear larger and then return it to the account using the 60-day rollover rule.
Some lenders may be strict with verification, which can put some strain on this workaround using the 60-day rule. However, you can also find other ways of investing this money in the meantime to help continue its growth. Lenders will also want to see that you can continue the distributions at the increased rate for at least three more years before they qualify you. On occasion, lenders will qualify you based on the assets in your IRA or a brokerage account using a specific formula. This formula helps determine if the value of the account is likely to stretch long enough to cover mortgage payments for the entire life of the loan. This information will show the lender that you can comfortably withdraw the minimum amount for payments each month.
Alternatives to a Traditional Mortgage
If a traditional mortgage does not seem to be a good option, there are alternatives you could consider. For example, you could take a margin loan on your brokerage account to help with the down payment or to cover a large portion of the purchase. Some brokerage firms will lend you money against the value of your portfolio, which is called borrowing on margin. You can use this money to purchase real estate even if it not for investment purposes. These loans are subject to margin call, meaning you could be asked to put more money in your brokerage account if the value falls. However, the interest rates on margin loans are generally quite low, even when compared to mortgages.
Another option is to pledge assets, which means to use your brokerage account assets as collateral. These loans have a set duration, which is usually quite short. The interest paid on these loans can frequently be deductible against portfolio income, so there is a tax benefit to it even if it is not as much of a benefit as with a mortgage. This sort of loan is ideal as bridge financing, as you prove income to a bank for a traditional mortgage.