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You’ve found it — that perfect retirement home on Lake Tahoe. The best oceanfront property in South Carolina. The cutest little cottage in the Smoky Mountains in Gatlinburg, Tennessee.
You may have other reasons for needing to move besides the “perfect home.” You may need to downsize, encounter physical challenges (particularly with homes with lots of stairs!) or have to manage a fixed income. You may also need to move to a new area due to better weather, favorable taxes, and being closer to family.
When you want to get a home loan as a retiree, you might wonder how a mortgage lender evaluates your income. You may not have regular income, so what does a mortgage lender actually take into consideration?
Let’s find out.
Lenders Want to See Your Income
First of all, can you even get a mortgage if you don’t have income coming in?
Yes. Lenders cannot discriminate against borrowers based on age, according to the Equal Credit Opportunity Act. Ultimately, it boils down to this: Retirees must show they can repay the mortgage, have good credit and not too much debt.
You can even take out a 30-year mortgage, even if you’re in your 70s. Lenders cannot take your age into consideration to make a final decision.
Let’s discuss the types of income that mortgage lenders may consider, including fixed income and assets.
Fixed Income Evaluation
Lenders will look at your last two years’ worth of tax returns to see how much income you’ve actually brought in over the last two years. This may include:
- Social Security
- Retirement money
- Pension income
- Dividends and interest
- Spousal benefits
How does it work when income comes in in a piecemeal fashion? Retirement account income can make a huge impact on your income on a month-by-month basis. A 401(k) plan or individual retirement account can play a major role in this process. You can access the money in your IRA, 401(k), or 403(b) at age 59½.
Your lender will also want to consider more than just your income. Lenders will want to see your bank statement to check your liquid assets. They will also want to see checking accounts, savings accounts, CDs and investments such as stock, bonds and mutual funds. They will also want to see the other types of property you own.
Your debt-to-income ratio (DTI) compares how much you owe each month to how much you earn. In other words, the DTI involves a calculation of the percentage of your gross monthly income before taxes that you use to pay for rent, mortgage, credit cards, car loans, boat loans, student loans — you get the picture. We’re talking about all types of debt.
How do you calculate DTI?
- Add up your monthly bills. This includes money you owe on a recurring basis, such as your monthly rent, alimony or child support. This does not include amounts that change on a weekly basis, such as your grocery bill.
- Divide the total by your gross monthly income, or your monthly income before taxes.
- You should get the result as a percentage, or your DTI. You want to have as low of a DTI as possible. In general, lenders want to see you at a 36% or lower DTI ratio.
Most mortgage lenders look at scores from all three major credit reporting agencies (Equifax, Experian and TransUnion) to determine whether they will offer you a loan. Your credit score also determines the interest rate on your loan.
You should check your credit report and correct the errors you see before you apply for a loan, because many errors could show up on your credit report. Common errors include loans in the wrong name, loans listed as open when you’ve actually paid them off and more.
The type of property you’re after may affect your interest rates and whether you qualify. Let’s say you plan to get a four-bedroom home on Lake Tahoe. The interest rate and costs may look significantly different compared to a small condo in Cincinnati, Ohio.
Believe it or not, underwriters have found that different types of properties have different levels of risk associated with them. For example, detached single family homes have the best rates. Multi-family homes usually carry higher rates because of their higher likelihood of default based on past homebuyer behavior.
Your Down Payment
What will you put down for a down payment? The higher your down payment, the lower your loan-to-value (LTV) ratio and the less risk you present to the lender. Shoot for putting down at least 20% or more to avoid having to pay for private mortgage insurance (PMI). PMI is a type of insurance that pays your lender if you default on your payments.
If you think you’ll have a tricky time getting a loan due to the fact that you don’t have regular income coming in, you may want to consider adding a co-signer.
Who could co-sign your application?
Your kids! (Remind them of the time you co-signed their student loans.)
The lender will consider both your income and your child’s income when they take a look at your loan application.
Fund Your Dream Retirement Home
By all means, try to qualify for your dream retirement home. You should spend all of your time doing exactly what you want during your golden years, right? Just note that since you no longer earn a full income, your lender may consider you as a bit more of a risk compared to those currently knee-deep in their careers.
However, if you check all the right boxes on your credit report, credit history, debt amount, savings amount, total assets and income, you can still qualify for a mortgage.
Don’t forget to compare multiple lenders so you can find the optimal interest rate for your needs. Even what looks like a slightly different interest rate — just 0.25% — can cost you a considerable amount of money over the life of your mortgage.
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