With an abundance of Americans reaching retirement age—10,000 people will turn 65 every day for the next two decades—some of those will be looking for a new place to call home and a way to finance it.
Given that interest rates are low and that workers, in general, continue to be confident they will have a comfortable retirement, more retirees may be looking to buy new homes, or refinance theirs.
You might think of the young and middle-aged as typical homebuyers and older people as more likely to have paid off, or nearly paid off, their homes and wanting to stay put.
But with opportunity in the air and a desire to downsize—and sometimes upsize—more retirees could well be in the market for a new home loan.
Recommended: Home Buyer’s Guide
Lenders and Age: No Legal Gray Area
Mortgage lenders look for a variety of things when vetting a home loan applicant. What they can’t do is take age into consideration when making a lending decision.
The Equal Credit Opportunity Act bans creditors from using age to influence a loan application decision.
Retirees applying for a home loan, like people still working, generally just need to have good credit, not too much debt, and enough ongoing income to repay the mortgage.
Here are some of the main factors you need to buy a house that lenders home in on:
• Primary home?
• Down payment
Let’s look at each.
While many retirees live on a fixed income, putting multiple sources of income together can help establish income that is “stable, predictable, and likely to continue,” as Fannie Mae instructs lenders to look for.
Social Security. The average monthly Social Security payout was $1,503 in January 2020, enough to contribute to a mortgage payment. But if Social Security is an applicant’s only source of income, they may have trouble qualifying for a certain loan amount.
Investment income. Sixty-six percent of older adults receive income from financial assets, according to the Pension Rights Center. But half of those receive less than $1,754 a year, the center says.
But for those who do receive investment income, it’s important to know that a lender generally looks at dividends and interest, based on the principal in the investment. If an applicant plans to use some of the principal for a down payment or closing costs, the lender will make calculations based on the future amount.
Lenders may view distributions from 401(k)s, IRAs, or Keogh retirement accounts as having an expiration date, as they involve depletion of an asset.
Home loan applicants who receive income from such sources must document that it is expected to continue for at least three years beyond their mortgage application.
And lenders may only use 70% of the value of those accounts to determine how many distributions remain.
Annuity income can be used to qualify as long as the annuity will continue for several years (three years is likely the minimum).
Part-time work. Retirees who earn money driving for a ride-share service, teaching, manning the pro shop, and so forth add income to the pot that a lender will parse.
Clearly, the more income a retiree can note on a mortgage application, the better the odds of a green light.
If your income level falls into a gray area, mortgage lenders are even more likely to focus on your debt-to-income ratio.
Debt-to-income is a straightforward proposition. It’s calculated as a percentage and it’s vetted by lenders and creditors as a percentage. Simply divide your regular monthly expenses by your total monthly gross income to get your debt-to-income ratio.
Let’s say you have $5,000 in regular monthly gross income and your regular monthly debt amount is $1,000. In that scenario, your debt-to-income ratio is 20% (i.e., $1,000 is 20% of $5,000.)
By and large, the higher your DTI ratio, the higher the risk of being turned down for a mortgage loan.
If you have a spouse who also has regular income and low debt, adding that person to the mortgage application could help gain loan approval. Then again, married couples applying for a loan may want to consider how a spouse’s death would affect their ability to keep paying the mortgage.
Lenders, though, cannot address that matter in the loan application.
Mortgage lenders also give great weight to consumer credit scores when evaluating a home loan application. That’s understandable, as a high FICO® credit score—740 or above is considered generally quite mortgage-worthy—shows lenders that you pay your bills on time and that you’re not a big credit risk.
It might be smart to take some time before you apply for a mortgage and review your credit report, making sure all household bills are paid up to date and no errors exist that might trip you up. And it’s a good idea to limit credit inquiries on big-ticket items. (And realize that several months may be needed to significantly increase a credit score.)
You can get a free copy of your credit scores at annualcreditreport.com and at any of the “big three” credit reporting agencies: Experian, Equifax, and Transunion.
Mortgage lenders will also take a close look at the home you wish to purchase.
In general, it’s easier to obtain a mortgage for a primary residence, as it represents the home you’ll live in long term and there’s only one mortgage to pay.
A second home, either as an investment or vacation property, is a riskier proposition, as it represents another mortgage to pay and may bring more debt to the lender’s mortgage approval score sheet.
Using the asset depletion method, a lender will subtract your expected down payment from the total value of your financial assets, take 70% of the remainder, and divide that by 360 months.
Then the lender will add income from Social Security, any annuity or pension, and part-time work in making a decision.
For borrowers in general, putting at least 20% down sweetens the chances of being approved for a mortgage at a decent interest rate.
Recommended: Home Affordability Calculator
As a retiree, if your income, debt-to-income ratio, and credit score are up to snuff, you’re as likely as any other borrower to gain approval for a new home loan. Lenders cannot legally take age into consideration when making their decisions.
Thinking about buying or refinancing in retirement?
SoFi home mortgage loans come with competitive rates, and as little as 10% down. And SoFi offers a traditional refi and cash-out refi.
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