How to Finance a Home in Retirement
Posted On November 19, 2020
You’ve finished working, paid off your debt, and 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 a 401K or IRA, you can use this withdrawal to generate income, as long as there is a sufficient balance for a 3-year continuance of income distribution. Then, if you put the money back into your 401K or IRA 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, unless it is a 401k or IRA.
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. However, different lenders calculate asset depletion differently. A loan officer will be able to determine if this is the best option for you.
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.