What Do Mortgage Lenders Need From Retirees?
June 2, 2021
6 min read
This story originally appeared on MarketBeat
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 house”. You may need to downsize, experience physical challenges (especially with homes with a lot of stairs!), Or have to manage a fixed income. You may also need to relocate to a new area due to better weather conditions, lower taxes, and being closer to your family.
When you want to get a home loan as a retiree, you might be wondering how a mortgage lender values your income. You may not have a regular income, so what does a mortgage lender actually consider?
Let’s find out.
Lenders want to see your income
First of all, can you even get a mortgage if you don’t have the income?
Yes. Lenders cannot discriminate against borrowers on the basis of their age, according to the Equal Credit Opportunity Act. Ultimately it comes down to this: Retirees need to show they can pay off the mortgage, have good credit, and not be in too much debt.
You can even take out a 30-year mortgage even if you’re 70. Lenders cannot take your age into account when making a final decision.
Let’s discuss the types of income mortgage lenders can consider, including fixed income and assets.
Fixed Income Valuation
Lenders will look at the value of your tax returns for the past two years to determine how much income you’ve actually generated in the past two years. This may include:
- Social Security
- Retirement money
- Pension income
- Dividends and interest
- Spouse’s benefits
How does it work when the income comes in piecemeal? Income from the retirement account can have a huge impact on your income month by month. A 401 (k) plan or individual retirement account can play a major role in this process. You can access your IRA money, 401 (k) or 403 (b) at the age of 59 and a half.
Your lender will also want to consider more than your income. Lenders will want to see your bank statement to check your cash flow. They will also want to see checking accounts, savings accounts, CDs, and investments such as stocks, bonds, and mutual funds. They will also want to see what 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, DTI involves a calculation of the percentage of your gross monthly pre-tax income that you use to pay rent, mortgage, credit cards, car loans, boat loans, student loans – you see the table. We are talking about all types of debt.
How do you calculate the DTI?
- Add up your monthly bills. This includes the money you owe on a recurring basis, such as your monthly rent, alimony, or child support. This does not include amounts that change weekly, 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 a DTI as low as possible. Typically, lenders want to see you at a DTI ratio of 36% or less.
Most mortgage lenders look at the ratings of the three major credit bureaus (Equifax, Experian, and TransUnion) to determine if 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 any errors you see before you apply for a loan, as there could be many errors on your credit report. Common mistakes include loans with the wrong name, loans listed as open when you actually paid them off, and more.
The type of property you are looking for can affect your interest rates and your eligibility. Let’s say you are considering purchasing a four bedroom home on Lake Tahoe. The interest rate and costs can look very different from a small condo in Cincinnati, Ohio.
Believe it or not, insurers 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 generally have higher rates because of their greater probability of default based on the behavior of past homebuyers.
What are you going to put for a down payment? The higher your down payment, the lower your loan-to-value ratio (LTV) and the less risk you present to the lender. Opt for a down payment of 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 in the event of a default.
If you think you will have a hard time getting a loan due to the fact that you don’t have a regular income, you may want to consider adding a co-signer.
Who could co-sign your application?
Your children! (Remind them when you co-signed their student loans.)
The lender will consider both your income and that of your child when reviewing your loan application.
Finance your dream retirement home
By all means, try to qualify for the retirement home of your dreams. You should be spending all of your time doing exactly what you want in your golden years, right? Just note that since you are no longer earning a full income, your lender may view you as a bit riskier compared to those who are currently engaged 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 may still be eligible for a mortgage. .
Remember to compare several lenders to 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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