Mortgages for retirees are the same as mortgages for non-retirees, right? Wrong.
If you’re a retiree looking to get a new mortgage or refinance an existing one the process will seem familiar. You’ll be given the same paperwork as non-retirees (for better or worse) and asked many of the same questions.
However, there are some specific laws and quirks related to retirement to be aware of as you dive in. Here are a couple of the biggest ones:
You Can’t Be Discriminated Against
You may have heard that you can’t get a loan because of your age. That’s not true.
The Equal Credit Opportunity Act (ECOA) explicitly forbids lenders from discriminating based on age. The law is policed by a number of government agencies, including the Federal Trade Commission (FTC), and every financial institution is very aware of it. You can learn more about the ECOA here.
If you feel that your loan application has been denied because of your age there are a number of actions you can take. You can see a list here. A good first step is to just let the lender know that you feel that the law has been broken — they may reconsider your application to simply avoid any trouble.
Your Income and Debt Really Matter
While you can’t explicitly be denied a loan based on age, there is a big roadblock retirees often hit when applying for mortgages: income.
Basically, a lender usually wants to see that you already have a consistent monthly stream of money coming in that is significantly larger than the loan amount. A few things to be aware of:
1) Savings are good, but not the same as income. A lender may like seeing nest egg stored away in a 401(k) or IRA — it shows that you have resources to draw upon — but they won’t always count it fully in your application. Why? Again, because they want to see that you’re regularly receiving money now, not someday in the theoretical future.
Here’s the problem: the need to show monthly income can conflict with the best tax strategy. Many retirees avoid taking money from their 401(k)s and IRAs to avoid paying higher taxes, but lenders often want to see current and regular withdrawals. What to do? We suggest talking to a financial planner, or even a lender, well ahead of when you plan to apply for the mortgage. A good advisor help you come up with a strategy that’ll give enough proof of income without forcing you to withdraw too much.
2) Social Security and pensions count. If you’re collecting Social Security or a pension, try to find your award letters. You may also want to pull together copies of deposited checks or bank statements to prove that you’ve been regularly receiving payments. Keep in mind that lenders prefer some pensions over others, depending on how they’re set-up and guaranteed. Also, even if you’re going to be receiving Social Security or a pension in the future, a lender may not count it now. They often only take into account money currently coming in.
3) Keep track your other income. If you have any additional sources of income — such as pay from a part-time job or rent from a property — get some documentation and include it in your application. Even if the amounts are small, they’re still something. Every little bit can help.
4) Your credit history still matters. A good credit score is a huge help in getting a mortgage at any age — that’s a given (to learn how to check your score read this). However, don’t just think about your score, think about your history. Income isn’t an isolated number in a lender’s eyes — it’s paired with debt. While too much debt is obviously not going to help, the idea of debt isn’t inherently bad. If you can show a long history of taking loans and paying them off, as many retirees can, that’ll help your case. And, as with income, current debt often matters more than past debt. A lender may actually like it if you’ve got some open lines of credit — like credit cards — that you manage responsibly.
Finally, one thing to keep in mind as you go through the mortgage process is that some lenders are more sophisticated than others. Some use very simple formulas for calculating income and debt, while others dive in deeper. A smart lender who understands retirement will take the time to factor in things like reduced taxes on Social Security income or expected 401(k) withdrawals. Also, some are just more open to risk than others. So, even if one lender denies your application, make sure to try others.
Photo by 401(k) 2013 via Flickr.