Somewhat frequently, we advise clients who want to purchase a home and obtain mortgage financing after they have retired. This presents a dilemma for both the buyer and the lender.
If you are the lender, how do you know whether the mortgage payments can be reliably made if a client has no earned income? If you are the buyer, perhaps the answer is obvious: You will be using your assets to fund the mortgage payments—but how do you generate a sustainable income stream?
The reasons for obtaining a mortgage may be obvious as well—among them, keeping money invested at a higher rate of return than the interest rate on the mortgage, possibly qualifying for a mortgage interest deduction on your tax returns, and retaining more assets to spend on your life goals in retirement.
There are companies who will lend money to people in retirement without a steady paycheck. The source of lending may come from a big, traditional bank, but increasingly, retirees have turned to “unconventional lenders” for mortgages. These are companies that will lend money based on the assets you have, as well as any steady streams of income.
Take, for example, someone in retirement whose only steady income is from a Social Security payment of $1,500. If they want to get a mortgage based on that income alone, the answer will be a definite “no” from almost any lender.
However, say that retiree has a $1 million investment account from which they consistently draw $5,000 per month. An unconventional lender will probably consider that an acceptable source of income, and the retiree may be able to qualify for a $350,000–$400,000 mortgage.
The lender will generally require verification that the client can afford the payments via a letter of certification based on an analysis of the underlying assets and the amount of income that can reasonably be expected.
Interest rates are typically slightly higher than the average mortgage for people in retirement, but this is not always the case, as there are many variables. At the end of February, in a conversation with an unconventional lender, I was quoted rates that ranged from 5.5% to 7%.
All lenders want to see the ability to make mortgage payments. More specifically, they want to see a steady stream of income from a source that would equate to normal lending standards: No more than 36% of your total annual income should be dedicated to your annual principal plus interest expense, including insurance and taxes (referred to as PITI—principal, interest, taxes, insurance).
Verification of this stream can come via a letter from your financial advisor or another professional who can legitimately verify that the amount of income their client is drawing can be sustainable over the long term (of the mortgage, that is).
Lenders will also typically want further verification via statements, tax documents, etc. So be prepared to gather and submit a lot of paperwork.
The good news is you have options for obtaining a mortgage in retirement. You may have to pay a higher mortgage interest rate, but it may be worth it.
Schedule a complimentary 15-minute call with a fee-only financial planner to discuss your situation.