Obtaining any loan depends on your ability to show the lender that you’ll be able to repay it. Retired people don’t earn the bulk of their income through work. Excellent credit and substantial assets may not be enough to qualify for a mortgage, but that doesn’t mean the loan is out of reach.
Qualifying for a mortgage
Most lenders weigh the same factors when considering your loan application:
– Your credit score
– The amount of your down payment
– Your liquid assets
– Steady employment / income for the past two years
– Your debt
– Debt-to-income ratio below the lender’s threshold (usually between 36 percent and 40 percent).
How a retiree can qualify for a mortgage
The Equal Credit Opportunity Act prohibits lenders from denying mortgages to retirees if all standard criteria are met.
First and foremost, you need a great credit score. Each lender sets its own minimum, but expect it to be between 720 and 760. Retirees tend to have an advantage with regard to credit score, since most have lessened their debt load and acquired better financial habits with age.
Social Security income and pension income are always counted. The lender can gross-up the income by 25% (give you credit for 25% more income) if you don’t pay taxes on it. The best way to document Social Security or pension income is to have the funds deposited directly into your bank account. Otherwise, provide copies of the award letters from Social Security or the pension plan.
Job stability, even part-time, can help you qualify. But most lenders will not consider part-time employment unless you’ve had the same part-time job for at least two years.
Income from retirement accounts is a gray area. The way lenders view it varies widely. Arm yourself with two years of statements showing consistent annual dividends and the income will be more likely to be well received and considered in your favor. If you don’t receive monthly income from your retirement accounts, you might find a lender who is willing to qualify you through asset depletion – amortizing a portion of your assets and applying it as income.
In any case, you’ll need to show enough retirement income to meet the debt-to-income (DTI) ratio requirements of the lender. That means that the total amount of money you are obligated to pay each month toward debt (including the mortgage you’re applying for) cannot exceed a certain percentage of your total monthly income. For example, if the lender’s DTI limit is 40 percent and your income is $2,500 per month, the lender will want to see that you spend no more than $1,000 on all of your debt, combined, including any auto loans, credit cards, student loan payments and other debt.
Furthermore, your mortgage payment alone (including taxes and insurance) cannot exceed a separate, lower percentage, generally around 28 percent of your income.
Different lenders will probably assess your income and assets differently. If you’re having trouble getting a mortgage, don’t give up. Find a great mortgage professional who can help you secure the loan that makes the most sense for your life and your finances.