If you are nearing retirement and considering applying for a mortgage, you may encounter challenges in qualifying due to potential changes in your income. While lenders cannot refuse a mortgage solely based on your age, they will assess your future earning potential, creditworthiness, and existing debts.
Upon retirement, your income is likely to decrease, which could impact the amount you qualify for when applying for a mortgage. Lenders will consider your anticipated income during retirement to determine your eligibility for a loan. Consequently, you may find that you are not eligible for the same mortgage options or loan amounts that you desire.
Can your mortgage application be denied because of your imminent retirement? No, mortgage lenders cannot reject your application just because you are planning to retire in the near future. While there are no specific laws addressing retirement discrimination in lending, the Equal Credit Opportunity Act prohibits lenders from discriminating based on age or the use of Social Security or other public assistance to meet mortgage payments.
However, if a lender becomes aware of your retirement plans, they may scrutinize your financial situation more closely. If they know you intend to retire within the next few years, they will want assurance that your assets and future income will be sufficient to meet your mortgage obligations.
When it comes to retirement income and mortgage eligibility, most lenders will not approve a mortgage if the monthly payment exceeds 31% of your projected gross income. Calculating this debt-to-income ratio can be complex as lenders prefer stable income that will continue for at least three years after loan closure. If your income will decrease or cease due to retirement, lenders will evaluate your eligibility based on your future earnings.
Your debt-to-income ratio is a critical factor, and different lenders have varying criteria for assessing your future retirement income and assets. Here are some common guidelines they follow:
1. Fixed Income: Lenders consider full benefits like Social Security and pensions in your income calculation. They may also “gross up” income sources that are not taxed by an additional 15% to 25% to help you qualify.
2. Assets: While retirement and investment accounts may not always be factored in, some lenders will consider accounts like a 401(k) or IRA if you can withdraw the total balance penalty-free and you are the sole owner. They may use a formula to include a portion of your assets in the income calculation.
Various sources of income may be accepted by lenders, provided that you will be receiving payments for at least three years. These sources can include government or corporate pensions, part-time employment, annuity income, and funds from eligible retirement accounts.
When applying for a mortgage, you may need to provide documentation from various sources including retirement accounts such as a 401(k), IRA, Roth IRA, as well as income sources like Social Security, Supplemental Security Income, and dividends from investments. It’s important to be transparent about your income and assets to avoid mortgage fraud. Taking out a mortgage just before retiring can be risky due to uncertainties in post-retirement finances and inaccurate Social Security benefit estimates. If you’re denied a mortgage, consider finding out the reason for the rejection and exploring alternative loan options or waiting until retirement when verifying income may be simpler.
Income security, such as FHA and VA loans, may be available to assist homebuyers. Are you eligible for homebuyer assistance, even if you are not a first-time buyer? Connect with a financial advisor in 4 simple steps to explore your options. Find answers to common questions about borrowing in retirement and applying for loans or mortgages as a retired individual.
Can a lender inquire about my age during the application process? Yes, but they cannot deny your application solely based on age. While age may be considered along with other factors like income and credit score, it cannot be the sole reason for rejection. The minimum age requirement is 18 years old.
Is it possible to qualify for a mortgage with Social Security income? Yes, Social Security benefits and long-term disability can be considered as income for mortgage qualification purposes.
Is hiring a financial advisor worth it for retirement planning? For most individuals, yes. A financial advisor can help manage your finances, plan for retirement, and provide guidance on retirement spending to ensure financial security.
What is the 28/36 rule? This rule is a guideline used to determine how much mortgage you can afford based on your income. It suggests that your mortgage costs should not exceed 28% of your gross monthly income or 36% of your total debt.
How much would the monthly payment be for a $400,000 mortgage? The monthly payment for a $400,000 mortgage depends on various factors including interest rate, credit score, mortgage term, insurance costs, property taxes, and PMI.
What happens to a mortgage after the borrower’s death? Unlike other debts, a mortgage is usually not transferable and must be paid off in full before the property title can be transferred. Those who are on the loan are typically responsible for the mortgage debt.
Can home equity be used to purchase an investment property? There are no restrictions on how home equity loan funds can be used, so it may be possible to use it for an investment property. However, borrowing against home equity carries risks, and it’s important to consider the potential benefits and drawbacks before proceeding.
“Opportunity Act” from the U.S. Department of Justice was accessed on December 20, 2024. For additional guidance, the originating and selling guide from Fannie Mae can also be accessed on the same date. The Social Security Administration provides an analysis of benefit estimates displayed in the Social Security Statement, which can be helpful for individuals planning for their financial future. In order to stay vigilant against mortgage fraud, the FDIC offers valuable insights that can protect consumers from potential scams.
Sarah Brady, a finance writer and educator, is well-versed in a variety of financial topics, ranging from personal and small business credit and loans to financial scams. Her expertise has been recognized by reputable sources such as Yahoo Finance, Forbes Advisor, CNN, Fortune, and Investopedia. As an NFCC-certified credit counselor, Sarah has conducted workshops on money management and assisted numerous clients in improving their credit scores. With a background as a former HUD-certified housing counselor and educator for the City of San Francisco’s affordable homebuyer programs, Sarah’s knowledge and experience are valuable assets in the financial industry.
This article has been reviewed and edited by Kelly Suzan Waggoner to ensure accuracy and clarity in the information presented.
