How to Get a Mortgage in Retirement

People getting a mortgage in retirement

One of the biggest factors in getting approved for a traditional mortgage is annual income, typically from a job. It’s not surprising then that people also believe that getting a mortgage in retirement becomes more difficult after they stop receiving steady paychecks. Casey Hamlin, branch manager for Northpoint Mortgage in Scarborough, Maine, says, “No, it’s really not.” 

Getting a Traditional Mortgage After Retirement 

After retirement, different sources of income are considered in the mortgage approval process. In some cases, says Hamlin, “it can be easier for retired people because they’re usually on fixed incomes,” making it easy to calculate cash flow. Instead of a salary, retirees might use investment income, pension, or Social Security income as the basis for approval. 

Hamlin explains that retirement assets can be used to derive an income, even if the applicant isn’t currently drawing on them. “What we find is that more and more people, as they’re living longer, defer those payments out as much as they can … but in the finance world, we can count income from, say, an IRA, even if they’re not actually receiving the money right now,” he explains. 

Richard Hill, AIF, president and lead advisor with Compass Financial Group in Raleigh, N.C., explains that “ongoing distributions from IRAs, 401(k)s, and other tax-deferred accounts [can be counted] as income that is acceptable for home mortgage applications.”  

Asset-based lending programs can be the solution for retirees with low or no income but substantial assets, including an asset depletion loan. “These loans calculate your monthly ‘income’ by dividing your total liquid assets by the duration of the mortgage (such as 360 or 180 months), essentially recharacterizing retirement assets into qualified income,” Hill says. 

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Getting a Reverse Mortgage After Retirement 

Another option for getting the money needed to buy another home is a reverse mortgage, which allows borrowers to take equity out of a house, usually limited to 60% or 70%, says Hamlin. A reverse mortgage is a financial vehicle designed specifically for older retired borrowers. It can also be used to fund the purchase of a new home.

A reverse mortgage offers benefits over a traditional mortgage because it allows the borrower to forgo mortgage payments, which can help increase monthly cash flow for people on a fixed income. UpNest  Simon Ru, CEO of UpNest in San Mateo, Calif., says, “If you don’t have a large 401(k) or a pension, a reverse mortgage can give your retirement savings additional time to grow. You can also delay your Social Security benefits until 70, at which time they’ll be at their maximum amount.”  

On top of giving your investments time to grow, “Another reason to consider a reverse mortgage is to help minimize investment portfolio risk,” says Ru. “While your investment portfolio should definitely be more conservative as you enter retirement, market downturns can still affect your retirement savings. A reverse mortgage can help people weather these fluctuations.” 

“A reverse mortgage does need to be repaid at some point, just not during the borrower’s lifetime or unless the borrower moves, does not honor all loan obligations,  or fails to pay property taxes and homeowners insurance,” Hamlin explains. “It’s a trade-off, but for some people, it makes a lot of sense,” he says. 

When to Consider a Home Equity Conversion Mortgage 

A home equity conversion mortgage (HECM) is a specific type of reverse mortgage insured by the Federal Housing Administration (FHA) and can be a good option if you meet certain extra criteria, says Hill. Providing you meet the requirements, Hill says a HECM is worth considering under the following circumstances: 

  • You don’t plan to move. Reverse mortgages can include more upfront fees than a traditional mortgage, making them less attractive if you’re not planning to stay put for long. 
  • You can easily afford the ongoing maintenance costs. One of the conditions associated with a reverse mortgage is paying property taxes and homeowner’s insurance on time and keeping current with any home maintenance issues.  

Some retirees decide to downsize once the children have grown and have established their own homes, while others may become snowbirds and purchase a second home in a more tropical locale. Whatever the reason you’re considering a home purchase, the good news is that retirees have several financing options. 

“You hate to see people rent in this market,” Hamlin says. “It’s not any cheaper and when you’re 70 years old, do you want to answer to a landlord?” he asks. The answer for many retirees today is “no.”