There’s a reason so many retirees downsize and relocate prior to their last day on the job.
Purchasing a home post-retirement is both a practical challenge and an emotional one. Though the federal Equal Credit Opportunity Act (ECOA) ensures that lenders cannot discriminate against someone due to their age, qualifying for a mortgage on a fixed income can still be difficult. Furthermore, owning a new home and paying a mortgage late in life — when health concerns, travel plans, and caring for aging loved ones take up a lot of your time and money — can feel overwhelming.
In this guide, we’ll walk through some of the most common challenges associated with purchasing a home in retirement. We’ll also talk about specific solutions that can help you achieve your dream of owning a new home in your golden years.
Challenge: A Fixed Income
Even folks who have never applied for a mortgage know that income is a key determining factor when it comes to qualifying for a loan. So, it’s easy to see why retirees are hesitant to show up at their local bank without a job or pay stubs, but those fears are not always founded. There are actually several ways to qualify for a mortgage using your assets. Any additional amount brought in from part-time employment, alimony or spousal support, Social Security, or pension payments will also count toward your monthly income.
Solution # 1 - Drawdown from Retirement
If you’ve planned for retirement and will be tapping into savings to cover your mortgage and other expenses, you can use the drawdown method. A borrower aged 59½ or older can show proof of income using bank statements indicating withdrawals from retirement accounts, like an IRA. The monthly withdrawal amount will serve as your monthly income for qualification purchases. Lenders typically require at least two months of withdrawals, and they may request to see a letter from a financial planner or institution to verify the withdrawal amounts.
Solution # 2 - Asset Depletion
If your retirement assets are invested, rather than liquid, asset depletion may work better for you. First, your lender will determine the current, total value of your assets. Then, he or she will subtract the amount you’ll use for a down payment and closing costs. Finally, your lender will take 70 percent of the remaining amount, and divide it by 360 months (the term of the loan). That amount will be used as your monthly income.
Challenge: Debt Ratios
When your income drops, so does the amount of debt you can hold and still qualify for a mortgage. Current requirements for a Qualified Mortgage state that a borrower can owe no more than 43 percent of their monthly income in debt payments. The number includes alimony, child support, car payments, student loan debt (for you or your children), credit card minimum payments, medical debt, and your projected house payment.
Solution # 1 - Pay Off Debt
If you have the extra money in savings, consider paying off enough of your debt to reduce your monthly payments. If you are using the asset depletion method above, be careful that the amount by which you reduce your assets doesn’t reduce your income calculation to the point you will not qualify.
Solution # 2 - Consolidate Debt Payments
Debt consolidation is often seen as a last resort for people with poor credit who have higher debt payments than they can afford, but that’s not necessarily the case. A personal loan or balance transfer credit card with a lower interest rate or longer term can lower your monthly debt payment amount. As an added bonus, it can save you money and improve your credit score in the long run. You should know that in the short term, the extra credit inquiry from applying for a loan can cause your credit to dip temporarily. Furthermore, continuing to use the accounts you’ve paid off could increase your debt.
Solution # 3 - Eliminate Debt
Another measure you can take is to eliminate as much of your debt as possible. If you’ve co-signed for a loan for an adult child who is now capable of refinancing without your help, consider asking them to do so. Or, if you have two car loans but only need one vehicle now that you are retired, consider selling the other one and eliminating a monthly payment altogether.
Challenge: The Down Payment
Down payments can vary from five percent (or less) to 30 percent (or more) depending on what type of loan and qualification method you use. Since cashing out your IRA can lead to tax consequences, coming up with a down payment can be a stumbling block to home ownership after retirement. This is especially true for seniors with little in liquid assets.
Solution # 1 - Think Outside the Box
While traditional mortgages require a hefty down payment, there are other loan options that don’t. Mortgages through the Department of Veterans Affairs (VA), the Navy Federal Credit Union, the USDA Rural Development Program, and the Federal Housing Administration (FHA) require down payments ranging from 0 to 3.5 percent. You can also purchase private mortgage insurance to secure a down payment as low as 3 percent of the purchase price of the home.
Solution # 2 - Buy a Fixer Upper
One sure-fire way to decrease your down payment is to buy a lower-priced home. Unfortunately, less expensive homes often need at least a little work to bring them up to standard. Many aging adults shy away from a fixer upper. In reality, a home that needs some work can be a worthwhile investment for a senior in retirement, because it provides the opportunity to create an accessible space that will allow you to age in place. You can hire a professional remodeling contractor near you who is certified and experienced with accessible design to incorporate the features and technology that will make it possible for you to stay in your home longer.
Let’s be honest — buying a home is not easy at any age or stage in life, including retirement. Even if you’ve been through the process before, the stress and uncertainty of finding the right home, qualifying for a mortgage, and making the move can easily overwhelm any prospective homeowner. However, knowing the challenges you will face — and their possible solutions — will inevitably help you navigate the process.