Keith Gumbinger, vice president of New Jersey–based HSH Associates, which publishes consumer loan information. HSH.com
Would you want to have a mortgage for the rest of your life—even as a retiree? Maybe you should. With today’s low interest rates, the old idea that a debt-free retirement is a safer and happier retirement is not necessarily valid. In fact, having a mortgage at today’s 4% (or thereabouts) interest rates actually can be a good way to boost the amount of savings a retiree has available to spend or to invest.
The problem: Unfortunately, although lenders are legally prohibited from discriminating against retired borrowers based on their age, mortgage-lending rules favor borrowers who still are in the workforce. Lenders expect borrowers to have significant income, and income is something that retirees often lack—even retirees who have substantial savings.
Here’s what retirees and near-retirees need to do to get a new mortgage or refinance an existing mortgage…
If you are nearing retirement: Apply for a mortgage before leaving the workforce, if feasible. If you are planning to buy a home as soon as you leave your job—perhaps because you’ll want to move to a retirement locale, downsize or both—try to buy one before you leave instead. Likewise, if you are thinking about refinancing on your current home to get a lower interest rate and/or take cash out of your home, explore this option before you leave the workforce. The mortgage process is likely to be quicker and simpler—and a larger number of lenders are likely to be interested in getting your business—if you apply while you still have earned income. Applying before retiring is particularly important if you want a “jumbo” mortgage, typically a mortgage of more than $424,100.
Also: Consider applying for a home-equity line of credit before retiring even if you do not currently need to access the equity in your home. Like a mortgage, a HELOC can be easier to obtain while you still have earned income…and it could come in handy down the road.
If you are retired and have little income beyond Social Security: When you initially contact mortgage lenders, ask whether they are familiar with “annuitization of assets” mortgages (also called “asset depletion” mortgages) as a way to overcome income requirements. Here is an example of how those requirements can block mortgage approval: A borrower’s monthly housing costs, including mortgage, property taxes and homeowner’s insurance payments, generally must add up to no more than 28% of gross income…and his/her total monthly debt payments generally must add up to no more than 43% of gross income. Retirees often have some income from Social Security and perhaps a pension, but with little or no earned income, most fall well short of what is required.
Fortunately, Fannie Mae and Freddie Mac, the government-backed agencies that repurchase many mortgages from lenders, quietly added a rule a few years ago designed to help retirees clear the income hurdle—lenders now can treat up to 70% of a borrower’s qualified retirement savings as if it were income spread over the length of the loan.
Example: A retiree who has $1,400 in monthly income, all from Social Security, is unlikely to qualify for a mortgage with a monthly payment of more than $392 based on that income, if he qualifies at all. But if that same retiree has $500,000 saved in IRA and/or 401(k) accounts, a lender can credit this borrower with additional monthly income of $972. Based on the 28% rule of thumb noted above, this retiree then might qualify for a mortgage with a monthly payment of as much as $664.
Even though this very helpful Fannie Mae/Freddie Mac rule has been in place for a few years, some lenders still are unfamiliar with it. And even if these lenders are willing to learn about it and work with you, their unfamiliarity with the rule would increase the odds of delays or mistakes—that’s why you want a lender who has used the rule multiple times before.
One catch: Fannie Mae and Freddie Mac do not purchase “jumbo” mortgages, which in most housing markets are mortgages of more than $424,100. As a result, lenders are unlikely to be willing to treat your assets as income with these larger loans.
If you already are retired but have not yet started receiving your Social Security benefits (and/or traditional pension plan benefits): Consider delaying your mortgage application until after you begin receiving these benefits if income could be an impediment to your loan. Mortgage lenders will count your monthly Social Security and pension benefits checks as income only if you have begun receiving them. Related: If minor children in your household receive Social Security benefits based on your (or your spouse’s) earnings history, these children’s Social Security income typically can be counted as income on your mortgage application as long as the benefits are slated to continue for at least three more years.
If you haven’t paid close attention to your credit scores lately: Check your credit reports. Do this three to six months before applying for a mortgage and then again as the application date nears. Notify the credit-reporting agencies of any mistakes. Also: Do not close credit card accounts even if you no longer use the cards in retirement. Having access to this credit and using it responsibly will benefit your credit scores.
Home owners typically refinance mortgages when doing so will allow them to lock in lower interest rates. Surprisingly, some retirees anxious to reduce their monthly bills might find that refinancing is beneficial even if it does not lower their rates at all. Refinancing can let them extend their mortgage loans over additional years, reducing monthly payments and freeing up retirement assets and income for other purposes. This does reduce the odds that they will ever entirely pay off their mortgage loans, however.
Example: Say a man took out a 30-year $200,000 mortgage in 2011. This loan had an interest rate of 4.25% and monthly payments of $984. Now, six years later, this man is retired and has $177,000 remaining on that mortgage. In today’s market, there’s a good chance that he could obtain a no-closing-cost 4.25%, 30-year loan for the remaining amount. If he did this, his interest rate would not improve—but stretching the loan out for an additional six years would reduce his monthly payment to $871, freeing up $113 in his monthly budget.