Can Retired People Still Get a Mortgage?

It is a common misconception that obtaining a mortgage becomes difficult or impossible for individuals in retirement. However, securing a mortgage is indeed possible for retirees. This article explains the various factors lenders consider and the specific options available to older adults seeking home financing.

Lender Evaluation Criteria

Lenders evaluate mortgage applications based on several fundamental factors. A credit score is a primary consideration, with higher scores indicating lower risk. While some loan programs may accept scores around 620, a score of 740 or higher often leads to more favorable interest rates and terms.

Another important metric is the debt-to-income (DTI) ratio, which compares an applicant’s total monthly debt payments to their gross monthly income. Lenders generally prefer a DTI ratio of 36% or lower, though some programs may allow for higher ratios, potentially up to 43-45% or even 50% for applicants with strong credit profiles and substantial reserves. The value of the property and the size of the down payment also play a significant role. A larger down payment can reduce the loan-to-value (LTV) ratio, making the loan more attractive to lenders.

Income Considerations for Retirees

Mortgage lenders recognize various forms of income common among retirees, assessing their stability and predictability. Social Security benefits, including retirement, disability, and survivor benefits, are generally accepted as qualifying income. Pension payments are also viewed favorably.

Regular distributions from retirement accounts, such as 401(k)s and IRAs, can be used, provided there is sufficient balance to support these distributions for at least three years beyond the mortgage application date. Annuity payments, particularly fixed annuities, are another acceptable source, with lenders requiring assurance that payments will continue for at least three years. To verify these income sources, applicants must provide official documentation like SSA-1099 forms, pension award letters, 1099-R forms, and bank statements showing consistent deposits.

For non-taxable income, such as certain Social Security benefits, lenders may “gross up” the income by an additional 15% to 25% for qualification purposes. This adjustment accounts for the absence of taxes, increasing the perceived income for debt-to-income calculations. While a history of regular distributions is generally preferred, some lenders may consider the entire account balance as a potential income source, particularly if substantial. For volatile assets like stocks or mutual funds within retirement accounts, lenders might use a discounted value, often around 70% of the asset’s value, to calculate potential income.

Asset Considerations for Retirees

A retiree’s assets are a significant factor in mortgage qualification. Liquid assets, such as funds held in checking and savings accounts, certificates of deposit, and money market accounts, are directly applied towards the down payment and closing costs. Beyond these upfront expenses, lenders often require “reserves,” which are additional liquid assets maintained after the mortgage closes.

These reserves function as an emergency fund, demonstrating the borrower’s ability to cover mortgage payments and other living expenses. The required reserve amount varies, typically ranging from two to twelve months of housing expenses, depending on the loan type. Acceptable assets for reserves include cash, stocks, bonds, and accessible retirement funds.

In situations where traditional income sources might be limited, some specialized loan programs, known as “asset depletion” or “asset-based” mortgages, allow lenders to convert a portion of a retiree’s liquid assets into an imputed monthly income. Under this approach, the total value of eligible assets is divided by a fixed number of months, often 120, 240, or 360, to determine a qualifying monthly income amount. This method benefits asset-rich individuals without a consistent traditional income stream.

Mortgage Options for Retirees

Retirees have access to various mortgage products, provided they meet qualification criteria. Traditional mortgage options include conventional loans, which are not backed by a government agency, as well as government-insured loans such as FHA (Federal Housing Administration) and VA (Department of Veterans Affairs) loans. Jumbo loans are also available for loan amounts exceeding conforming limits.

Another distinct option for eligible older homeowners is a reverse mortgage, most commonly the Home Equity Conversion Mortgage (HECM), which is insured by the U.S. Department of Housing and Urban Development (HUD). Unlike traditional mortgages that require monthly payments, a reverse mortgage allows homeowners aged 62 or older to convert a portion of their home equity into cash. The loan generally does not require monthly mortgage payments; instead, the interest and fees are added to the loan balance, which grows over time.

The loan becomes due when the homeowner sells the home, moves out permanently, or passes away. Borrowers remain responsible for property taxes, homeowner’s insurance, and maintaining the home. Reverse mortgages can provide financial flexibility by supplementing income or covering expenses without monthly mortgage payments. However, the increasing loan balance reduces the home equity over time, impacting inheritance. Prior to obtaining a reverse mortgage, applicants are typically required to complete a counseling session with a HUD-approved counselor.