One of the primary considerations for people preparing for retirement is housing—will you be buying a house in retirement? Staying put? Downsizing? Renting?
If you’re leaning toward buying, the home-purchasing journey for a retiree can look quite different from that of people in other stages of life. We interviewed Mike Steward, vice president for real estate sales at Real Property Management, the largest residential property-management franchise in North America. He explains what it’s like to sort through retirement-home options and apply for a mortgage after retirement.
Is Buying a House in Retirement Right for You?
“When you buy your first few homes, you’re usually following a job or buying for your current life situation,” Steward says. But now you’re looking at purchasing the place where you’ll get older, and that introduces a whole new set of factors. After taking all these things into consideration, you may decide that renting during retirement is a better option.
Key Factors to Consider Before Buying
Your retirement income
It can take a while to adjust to the idea of a fixed income. You’re used to dividing up a paycheck into savings, investments and expenses, but now you may be living off a patchwork of assets—Social Security, distributions from retirement accounts and other sources of income.
Estimating ongoing expenses
It also takes some time to figure out the other side of the ledger. What will be the cost of living in the area you’re considering? How expensive will it be to live the way you envision? With a lot of careful thought, you can develop a rough approximation of how much money you will need—and can afford—to spend in retirement. But because you don’t know how long you’ll live, that figure will always be a little fuzzy.
Planning for health and future care needs
“None of us like to think about getting old,” Steward says. “It’s so hard to look at what things might be like three years, five years, 10 years, 15 years down the road. But if we’re lucky, we’ll get to an age when we’re going to need some assistance.” So it is crucial to make careful choices now to ensure that you’ll be comfortable later. Are you looking at places with a single level and accessibility throughout? Prioritizing proximity to doctors and medical centers? Will you put yourself close to family members who could help you if needed? Are you making room in your budget for hiring help or transitioning to assisted living? None of that is fun to think about, Steward admits. “It requires being bold enough to look in the mirror and ask yourself, Will my future self thank me for this?”
Mortgage Options for Retirees
Qualifying for a mortgage as a retiree means that, probably for the first time ever, you’re attempting to get approved without a paycheck. Since you’re using retirement income to buy a home, instead of a W2, your lender will consider Social Security income, pensions, annuities, required minimum distributions (RMDs) from retirement accounts and investment income.
Lenders also will look at your debt-to-income (DTI) ratio. DTI for retirees comes with certain advantages. Example: Since Social Security income isn’t taxed, a lender may boost up that monthly figure, lowering your DTI. You also may benefit from an artificial boost in income because you’re using assets as income. Retirees often do well on the debt side, too, because they may not have a mortgage and have low or no debt. But: Retirees who live primarily off savings without showing regular withdrawals may be viewed as having a lower income than they actually do.
Note: A lender generally cannot deny a mortgage simply because of the borrower’s age. Under the Equal Credit Opportunity Act, age is a protected category, and the Consumer Financial Protection Bureau says lenders generally cannot use age to make mortgage credit decisions. Lenders can, however, evaluate whether the borrower has stable, documentable income and the ability to repay the loan.
Special loan programs
Retirees may have access to certain types of mortgages that benefit their situation…
- Conventional loans: Most retirees take out a conventional loan backed by Fannie Mae and Freddie Mac, which provide competitive rates and terms of up to 30 years.
- FHA loans usually have lower credit-score requirements and smaller down payments but entail the added cost of mortgage insurance.
- VA Loans: These are available to eligible veterans and often require no down payment or mortgage insurance.
- Portfolio loans are in-house mortgages provided by local banks and credit unions. These institutions often have greater lending flexibility than big banks.
Should You Downsize, Rent or Buy?
Downsizing in retirement can be wise. There’s little sense in paying for a bigger house than you need. And it can be a shrewd move to sell your current home, buy a less expensive one and use the difference to pay for the new home mostly in cash or take a small, manageable mortgage.
The big question—renting versus buying? There’s a lot to think about. If you buy a home, will you be comfortable there if/when you can no longer climb stairs or perform basic repairs and upkeep? Will all the responsibilities of home ownership allow you the freedom to live your dream retirement? Perhaps that involves lots of travel, so you might regret buying a house with a lawn that has to be mowed all summer.
Renting also gives you financial liquidity and flexibility to move again if you need to. Example: If you’re considering buying a home to be close to your grown children, their pursuits could prompt them to move out of the area in just a few years. Will you want to be saddled with a mortgage in a place where you no longer have family nearby?
And for probably the first time in your life, you’ll be living on a fixed income, battling inflation year by year, with your purchasing power decreasing as your savings diminish. On one hand, buying a house with a fixed-rate mortgage is a hedge against inflation. As other people’s rents rise, your monthly housing payment stays essentially the same. But on the other hand, taxes, HOA fees and insurance can also creep up. And will you be able to absorb the costs of upkeep in a house that you own? These days, newly built homes are notorious for having systems and components that start failing after only 10 years. Unfortunately, this moment could arrive right alongside the onset of a retiree’s diminishing health and the reality of dwindling savings.
Steps to Buying a Home in Retirement
Here are the steps if you do decide to buy a home in retirement…
- Get preapproved for a mortgage. You can improve your chances by fronting a bigger down payment and opting for a shorter-term loan. But before applying, be strategic in your use of assets. Move funds into accounts that are easy to document, and set up systematic withdrawals to show consistent income. Credit score requirements for retired homebuyers are no different than for other borrowers—620 at a minimum…and 680 to740 or better to get a competitive rate.
- Calculate affordability. Be conservative about what you can afford. Leave plenty of room for future expenses and for the unexpected.
- Choose the right location and home. This is the most enjoyable part, but it can still be fraught with potential disaster. Seek outside counsel and constantly ask yourself if you’ll be happy with your choice 10 or more years from now.
- Navigate the closing process. It’s especially important for retirees to avoid changing their financial profile between mortgage approval and closing. That means not moving assets around, not stopping automatic withdrawals, not suddenly drawing less income, and not doing anything that will change your credit rating. Be sure to leave yourself with six to 12 months of accessible cash after closing.
Tips for a Smooth Homebuying Experience
Start years in advance by cleaning up your credit score, lowering your debt and saving up a down payment. As you move toward a purchase, says Steward, “Find a team to work with you that you can lean on. That means finding an agent, a title company and a lender that you can feel good about.” Having the right people in your corner can make a world of difference.
Common Mistakes to Avoid
- Don’t rush into a decision. Too many retirees rush into buying a house without being realistic about their future needs. “If it’s possible, rent for a while after you’ve retired,” Steward says. “Get used to living on a fixed income. Once things feel settled, then it might be time to buy.”
- Don’t take on too much debt. “Maybe you’re qualified for that $500,000 house,” he says, “but it might be time to buy something smaller, for that longer-term flexibility, to leave yourself the options of traveling and doing other things that matter to you.”
