How to Finance a Home in Retirement
You’ve finished working, paid off your debt, and have finally gotten the kids out of the house – now, it’s time to retire and relax. However, relaxing can be hard when you’re still responsible for keeping up a family-sized home. If you’re tired of maintaining a large house, but still want the benefits of owning a home, it might be time to downsize. Unfortunately, downsizing to a smaller home requires you to apply and qualify for another mortgage – which can be unfamiliar when you don’t have a salary.
Lenders take several factors into account when assessing your ability to take on a loan. One of the largest influencing factors is a borrower’s debt-to-income (DTI) ratio – which is a percentage that expresses the amount of gross monthly income put toward your monthly debt payments. A good DTI is typically 36% or lower – the lower the better. Borrowers with lower DTI ratios are more likely to afford their monthly debt payments and make their mortgage payments on time and in full.
Without an income, it’s harder for your lender to determine if you can effectively handle a mortgage loan. For retirees, lenders typically look at tax returns from the last two years, taking into account any money you have from Social Security, pensions, dividends, or interest. While this taxable income can help some borrowers qualify for a loan, it may not work for all.
In this case, retirement savings like a 401(k) or individual retirement account (IRA) can be used to your advantage. As long as you’re at least 59 ½-years-old, you can take money out of your 401(k) or IRA without facing the 10% early-withdrawal penalty. When you withdraw from your savings account, you can generate income reflected on your bank statements and satisfy your lender’s income requirements. Then, if you put the money back into your account within 60 days, it will not be taxed. After 60 days, your withdrawals are locked in and you would have to start paying income taxes.
Another option that could help you qualify for a mortgage without an income is called asset depletion. Asset depletion is when your lender determines if the money in your IRA or brokerage assets could cover mortgage payments over the life of your loan. A lender calculates this by applying a formula to the money in your accounts -- subtracting any down payment from the account totals, taking 70% of the remainder, and dividing it by 360 months.
“In this scenario, the underwriter is not looking directly for a taxable transfer from an IRA to a bank, but a statement of assets that allows [the lender] to be comfortable that a certain amount could be withdrawn each month,” said Daniel Graff, certified financial planner and principal and client advisor at Sullivan, Bruyette, Speros & Blayney in McLean, Virginia.
Qualifying for a loan in retirement might be different than when you were employed, but it’s far from impossible, especially with our help. If you’re interested in downsizing, let us know, and we would be happy to talk to you about your mortgage qualification options.