Many plan their retirement yet due to recent events some may be entering retirement not out of choice but by necessity i.e. job loss, furloughed and so forth. While mortgage look to income as a predictor of repayment retirees have options. Also the following is not just for retirees as I am one of those employed who receives a 1099 and not a W-2 thus I too have challenges as my income varies. In a nutshell:
- If your tax returns don’t show enough income to qualify, you may be able to tap your retirement account temporarily to prove you can afford the mortgage.
- Alternatively, you may be able to qualify based on assets in that account or explore “pledging assets” to make the purchase.
- The average interest rate on a 30-year mortgage is just above 3%; for a 15-year fixed-rate mortgage, it’s about 2.7%.
For retirees and those who have erratic incomes may have capital however they show very little income and thus may be challenged securing a mortgage. Similar to securing a traditional mortgage it is important to have a good credit score, monthly expenses that are typical and available capital for the down-payment (of course higher percentage of down-payment the smaller the mortgage).
Retirement Qualifying Income: Lenders generally will look at your last two years’ worth of tax returns to see what that amount is. It may include, for instance, Social Security, pension income, dividends and interest. However one’s taxable income may not be enough to qualify for the loan on its own. That’s where a retirement account like a 401(k) plan or individual retirement account can come into play. The idea is that you take distributions to help you qualify for the mortgage, even if you don’t need the money. As long as you’re at least age 59½, you can tap your IRA or 401(k) plan without paying a 10% early-withdrawal penalty.
Concerning not necessarily needing the money except to qualify for a mortgage under rollover rules applying to retirement accounts, you can put the cash back within 60 days without the distributions being taxable. It is important to mark the 60 days on a calendar as beyond 60 days, the withdrawals would be locked in and you would owe income taxes on the distribution. Of note most lenders will still look at the retirement accounts to see if such distributions can be sustained for a minimum 3 years.
Now for those who may have a larger brokerage account and/or IRA you could potentially qualify for a mortgage based on your assets. The lender applies a formula to the money in your account — using 70% of the value of the account — to determine whether it could stretch long enough to cover mortgage payments for the life of the loan. Basically the lender is looking at what I called a “Statement of Assets”.
Concerning Statement of Assets another option is the “Pledge of Assets” essentially taking a loan against your brokerage account — up to a limit — and purchase the home that way. One advantage is technically you would not have a mortgage and would be considered a “cash-buyer”. Different brokerages have different requirements and best to have a long-standing relationship with your brokerage. Of note, one of my clients used this option to purchase a home and then within 6 months refinanced the home with a conventional mortgage as brokerages and pledged assets are usually available only shorter-term i.e. 3-5 years.
As mentioned I am in a similar position as both my wife and I are gainfully employed at present and could qualify for a loan easier now than in the future HOWEVER we are also conservative and not keen on purchasing just to secure a low interest-rate and worse purchasing based on a payment and not underlying equity and potential appreciation.
We too are frustrated as inventory is low, prices are high (highest in 2+years) and the market shows few signs of adjusting downward. On the flipside I do not believe “this time is different” and I am willing to wait as our last home which was supposed to be a 3-5-year hold extended to 27+ years.