Can you get a mortgage if you’re retired, even though you no longer receive a regular paycheck?
The good news: Yes, you can.
Though, qualifying for a mortgage with retirement income comes with specific requirements. Similar to getting a mortgage before retirement, you’ll need to have reliable income now and the foreseeable future that shows you can repay the mortgage, you must have good credit, and have little debt. (Your age shouldn’t come up at all — the Equal Credit Opportunity Act prohibits creditors from discriminating against loan applicants because of their age.)
Retirement mortgages explained
Getting a loan, even when you aren’t retired depends on your income, credit history, amount of debt, and your assets. For retirees, assets become even more important because many won’t have regular income except for possibly Social Security benefits.
“It’s an individualized situation. Some people wouldn’t dream of having any debt when they retire. Others are OK with it, says Peggy Doerge, president of the Iowa Mortgage Association and vice president of senior underwriting at MidWestOne Bank. “In fact, some retirees get advice from their financial advisors to refinance their current mortgage or take out a new mortgage.”
For example, if a retiree is making 5% on their assets and they can qualify for a mortgage loan for 3.5%, plus get tax deductions, then a loan makes sense, says Doerge.
When trying to qualify for a mortgage, it’s important for retirement income to be steady, predictable, and expected to continue whether the retiree is upsizing or downsizing. Mike Egermier, financial consultant at Egermier Wealth Management Group says, “In general, lenders are looking for cash flow at regular intervals — a pension is viewed more favorable compared to an IRA in the stock market.”
Retirement income can come from a variety of sources including:
- Social Security income. If the Social Security income is for the retiree, then it’s considered to not have an expiration date, but if the Social Security income is from a family member (like survivor or spousal benefits), then the borrower must prove that the income is secure for at least three more years.
- Retirement or pension income. This asset isn’t expected to expire and can be counted as income. Some pensions decrease the income amount for surviving spouses, though — make sure that your spouse can cover all the bills, plus the mortgage in the event of your passing.
- Annuities. If the borrower can document that this income will continue for at least three years, then it can be listed on the mortgage application.
- 401(k)s, IRAs, and Keogh plans. The retiree needs unrestricted access to these accounts without incurring any penalties — those under 59 ½ years of age usually can’t withdraw funds from their 401(k) without paying withdrawal penalties. Distributions from these investments must last for at least three years after the date of the mortgage application. Also, if any of these retirement accounts consist of stocks, bonds, or mutual funds, then lenders can only use 70% of the amount received as income due to their volatile nature.
In general, having a good credit score is a prerequisite for loan qualification, but each lender has different requirements. Credit score requirements can also vary depending on your situation like the type of loan and your down payment amount. For example, FHA loans require a larger down payment for lower credit scores. Your credit score also affects the interest rate you’ll qualify for; in general, the higher the score, the lower the interest rate.
Your debt-to-income ratio also plays a part in getting a mortgage in retirement. According to the Consumer Financial Protection Bureau (CFPB), 43 percent is the highest debt-to-income ratio a borrower can have to qualify for a mortgage (some lenders offer exceptions). This means that all debt, including car, credit card, and student loan payments, plus the monthly mortgage payment, including property taxes and homeowners insurance must be 43% or less of the borrower’s gross monthly income.
Retirement mortgage advice
Before retiring, it’s a good idea to meet with a financial advisor and a loan officer to learn about your retirement mortgage options. These financial professionals should direct you to specific mortgage programs that are the best for your situation and ultimately help save you money.
It’s also important to have a budget before talking to a lender. You need to know the answers to how you’ll cover costs if inflation hits or your property taxes skyrocket, says Egermier. He also adds it’s important to factor in costs if a medical problem arises or your health insurance costs significantly increase.
“One trip to the hospital can eat away at your savings.”
When deciding if getting a mortgage when retired is a good idea, an individual of retirement age should know the answers to the following questions (some of these you may need to consult a financial professional):
- Will your income decrease after retirement?
- How long will your income last?
- Is your current home paid off?
- Are you eligible for tax breaks that will increase your income?
- How will your household income change if a spouse passes away?
- Are you comfortable incurring more debt?
Should you pay off your mortgage or invest in additional retirement savings.
According to the Center for Retirement Research’s study titled “Should You Carry a Mortgage Into Retirement” paying off your mortgage is the better choice unless you “can earn a risk-free return that exceeds its mortgage interest rate; or cannot satisfy its demand for risky assets without borrowing money. Few meet these exceptions, so the payoff option is the best bet.” Basically, this minority is those who are willing to invest in stocks an amount that is equal to or exceeds their loan amount.
Should you pay off your mortgage or refinance your mortgage before retirement?
Refinancing is generally a good idea if it lowers both the mortgage payment and interest rate. But, only the retiree can answer whether it’s best for their situation. It depends on their income, current mortgage payment, amount in savings, and whether or not the tax advantage of the mortgage interest is enough to counteract their expenses.