Considering a home purchase in Retirement?

If you are retired and are thinking about downsizing or relocating, and it involves buying a home, you might want to look into how you would finance it. You may discover that qualifying for a mortgage is different from the last time you bought a house. Not only have lenders tightened credit during the covid pandemic, retirees generally have left a steady paycheck behind.

It can be tricky for retirees to get a mortgage. You can have a lot of money but show very little income and have difficulty qualifying for a mortgage. It frustrates a lot of retirees. The average interest rate on a 30-year mortgage is just under 3%, while a 15-year fixed-rate mortgage is about 2.5%. With rates low and inventory in many markets tight, it may be necessary for retired homebuyers to do some strategizing and planning ahead.

Of course, the typical aspects of qualifying for a mortgage such as having a good credit score, monthly debt that is not too high, and the required down payment would apply as well. The specifics will depend on the lender and the type of mortgage retirees are seeking. The most common way for retirees to get a mortgage is by qualifying based on income.

Lenders generally will look at retirees’ last two years’ worth of tax returns to see what that amount is.

The tax returns may include Social Security, pension income, dividends, and interest. However, retirees’ taxable income may not be enough to qualify for the loan on its own. That is where an account like a 401(k) plan or individual retirement account (IRA) can come into play, basically creating more cash flow to satisfy the lender. The idea is that retirees take distributions to help qualify for the mortgage, even if they do not really need the money.

As long as retirees are at least age 59½, they can tap their 401(k) plan or IRA without paying a 10% early-withdrawal penalty. Also, under rollover rules applying to retirement accounts, seniors can put the cash back within 60 days without the distributions being taxable. Beyond that time frame, however, the withdrawals will be locked in and retirees will owe income taxes on the money.

Meanwhile, the lender will see the income on retirees’ bank statements, where the money came from, and when it hit their accounts. Mortgage lenders are getting stricter on the historical verification, which may restrict opportunity in the future. In addition to seeing verification of the required income, lenders will want to be sure that the distributions can continue for at least three more years.

Alternatively, retirees could potentially qualify for a mortgage based on their assets in a brokerage account or IRA.

Essentially, the lender applies a formula to the money in the retiree’s account to determine whether it could stretch long enough to cover mortgage payments for the life of the loan. 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. One alternative to a mortgage is to pledge assets by taking a loan against the retiree’s brokerage account and purchase the home that way.

That way, it would be considered a cash buyer for purposes of the contract with the home seller. There is not a mortgage happening at that point because in actuality the retiree would be taking the loan against his brokerage account. However, the longest term for such a loan is five years. Retirees could almost use that loan as bridge financing and plan more carefully how to prove income to the bank.

In other words, it might be a way to get a home more quickly because seniors would not have to go through the underwriting process and the associated costs involved in mortgages. And then seniors could figure out their traditional mortgage options. In September 2020, the median savings balance among seniors was alarmingly low, and that meant many risked untold financial struggles.

Social Security paid the average senior about $1,500 a month, or $18,000 a year.

That was a nice chunk of money to supplement outside income sources, but it was certainly not enough to live comfortably on. Yet many seniors risked having to do just that, and the reason boiled down to not having enough retirement savings. Seniors had a median $45,000 in savings, and that excluded home equity. And while home equity could serve as a retirement income source of sorts, it could not take the place of a robust IRA or 401(k).

If a senior was approaching retirement and looking at savings in the ballpark of $45,000, he was not ready to stop working just yet. If the senior did, he might really set himself up for long-term financial struggles. Seniors needed healthy savings to get by. There was no single savings number that would guarantee a senior financial security during retirement.

Some seniors could kick off their golden years with $100,000 in savings and did just fine, while others could retire with $1 million and still struggled. But as a general rule, it was a good idea to close out a career with around 10 times the ending salary socked away for the future. If a senior’s savings balance is closer to $45,000, it meant he was probably nowhere close.

In that scenario, the senior had to push himself to work longer.

Doing so would allow the senior to both accumulate additional savings while simultaneously leaving his existing savings alone. If a senior was 65 and ready to retire, but instead work until 70, all the while contributing $500 a month to a plan and investing it at a conservative average annual 5% return, he would add over $33,000 to his nest egg. Another tactic to employ in this scenario was to delay Social Security filing until a senior turn 70.

A senior was entitled to full monthly benefit at either age 66, 67, or somewhere in between, depending on the year of birth. But for each year delayed past that point, a senior’s benefits increased by 8%, up until age 70, and that increase was permanent. Financial experts had long supported a 4% annual withdrawal rate from savings. For $45,000 in savings, that meant $1,800 in annual income.

Combined that with $18,000 a year from Social Security, it was still not a lot to live on. If a senior was not yet retired and did not have much savings, it definitely paid to boost his nest egg as much as he could while also delaying his Social Security filing to increase his benefits. But even that might not be enough. He might still have to think about getting a part-time job as a senior, renting out a portion of his home, or employing other creative measures to ensure that he was able to make ends meet.

Either way, the key was to be realistic about retirement income needs and not went into senior years assuming it would be just fine with $45,000.

Most Americans were a few years behind on their retirement savings. Once a senior learned how to maximize his Social Security benefits, he could retire confidently with a peace of mind.