Retirement is an exciting new chapter, and for many, it’s also the perfect time to buy a home or refinance. However, qualifying for a mortgage when you’re retired or about to retire requires some strategic planning. Here are key tips to help ensure you meet lender requirements and secure the best loan terms possible.
1. Consider an Asset-Based Loan
If your income from Social Security or pensions isn’t enough to qualify for a traditional mortgage, you may be able to use an asset-based loan (also called an asset-depletion loan). Lenders calculate a portion of your liquid assets—such as savings, investments, or retirement accounts—as qualifying income, allowing you to qualify based on your financial reserves instead of a steady paycheck.
2. Plan Your Retirement Account Distributions Wisely
Lenders look for consistent income, and setting up regular IRA or 401(k) distributions can help demonstrate stable cash flow. If you don’t already have a required minimum distribution (RMD), consider setting up a monthly or annual withdrawal schedule to show predictable income. It is ideal to have these distributions set up in advance but there are cases where you can set them up right before getting a mortgage.
3. Buying Before Retirement May Be Easier
If you’re still working but plan to retire soon, it may be easier to qualify for a mortgage before you retire while you still have employment income. Depending on the situation, lenders could favor borrowers with steady W-2 or self-employed income over those relying primarily on retirement funds.
4. Maintain a Strong Credit Profile
Even if you have significant assets, lenders still evaluate your credit score and history. Keep your credit score high by paying bills on time, keeping credit utilization low, and avoiding new large debts before applying for a loan.
5. Keep Debt-to-Income (DTI) Ratio in Check
Even in retirement, your DTI ratio matters. Depending on the loan program your DTI ratio should be below 49-57%, meaning your total monthly debt payments (including the new mortgage) should not exceed 49-57% of your gross income. Conventional loans will be on the lower end of that range while FHA & VA loans can be on the higher end of the scale. Reducing outstanding debts before applying can improve your loan approval odds.
6. Document All Sources of Income
Besides pensions, Social Security, and retirement accounts, be sure to document any rental income, annuities, dividends, or other investments. A lender will use these sources to calculate your ability to repay the loan.
7. Explore Loan Programs Designed for Retirees
Certain loan options cater specifically to retirees, including reverse mortgages (for those 62+), Home Equity Conversion Mortgages (HECM), and some portfolio loans. Discuss with your mortgage professional which options align with your financial goals.
By preparing in advance and structuring your finances strategically, you can improve your chances of securing the right home loan in retirement. If you have questions, please reach out directly at nick.ross@edgehomefinance.com or 720-250-7764!
