How Can a Retired Person Buy a House?

Purchasing a home in retirement is an achievable goal. Navigating the housing market requires understanding how retirement income and assets are evaluated, along with available financing options. This ensures a secure homeownership experience.

Qualifying with Retirement Income

Mortgage lenders assess various forms of retirement income to determine a borrower’s ability to repay a home loan. Social Security benefits are generally considered stable income by lenders. To verify this income, applicants typically provide an SSA-1099 form and a current benefit letter from the Social Security Administration, confirming the monthly payment. If the Social Security income is non-taxable, lenders may “gross up” this amount by 15% to 25% for qualification purposes, recognizing that it has more purchasing power than taxable income.

Pension payments are another common and stable income source for retirees. Lenders require documentation like an award letter, a 1099-R form, and bank statements showing consistent deposits to verify pension income. For pensions expected to continue for at least three years, lenders typically include 100% of this income in their affordability assessment. Similarly, annuity income can be used for mortgage qualification, provided there is clear documentation like the annuity contract and evidence of recent payments. Lenders prefer stable and predictable annuity income, ideally continuing for at least three years post-application.

Distributions from retirement accounts, such as 401(k)s and IRAs, can also be considered income for mortgage qualification. Lenders will require statements showing the account balance and proof of scheduled, consistent withdrawals. Many lenders require evidence that withdrawals can be sustained for at least three years. Generally, lenders may consider up to 70% of the account’s value for income calculation due to potential market volatility.

Leveraging Assets for Home Purchase

Accumulated assets can significantly aid a retired person in purchasing a home, serving various financial needs. Liquid assets (e.g., checking, savings, money market, brokerage accounts) are commonly used for down payments and closing costs. Lenders typically require statements for the most recent two months to verify these funds and ensure they are “seasoned,” meaning they have been in the account for at least 60 days. This seasoning requirement helps confirm the funds are genuinely the borrower’s and not recently borrowed.

Beyond the initial purchase, liquid assets can also serve as financial reserves, which lenders may require to cover mortgage payments during unforeseen circumstances. These reserves are measured in months, representing the number of monthly mortgage payments that could be covered by accessible funds. Acceptable assets for reserves include:
Checking and savings balances
Vested retirement accounts (like 401(k)s and IRAs)
Stocks
Bonds
Mutual funds
Certificates of deposit

Lenders may impose reserve requirements for those with lower credit scores or for larger loan amounts.

Equity from the sale of a previous home is often a substantial source of funds for a new home purchase. This capital can be applied directly to the down payment, reducing the need for a new mortgage or lowering the loan amount. Using sale proceeds can also provide a strong financial position, potentially leading to more favorable mortgage terms. In situations where non-liquid assets, such as certain investment properties or valuable collectibles, are part of a retiree’s portfolio, they can be converted into liquid funds prior to the home purchase. While lenders primarily focus on liquid assets, the ability to convert other assets into cash demonstrates a broader financial capacity.

Financing Options for Retirees

Several mortgage products are available to retirees, each with specific considerations for income and asset qualification. Conventional mortgages typically require a debt-to-income (DTI) ratio below 36%. Some conventional loans may require borrowers to demonstrate financial reserves, typically ranging from two to six months of mortgage payments, depending on the borrower’s financial profile and the property type. These reserves can include various liquid assets or vested retirement funds.

Federal Housing Administration (FHA) loans offer a government-insured option with more flexible credit and down payment requirements, making them accessible to more borrowers. FHA loans generally have lower reserve requirements than conventional loans; reserves are typically only required for one- or two-unit properties if specific risk factors are present. Income documentation for FHA loans, including retirement income, must demonstrate continuance, similar to conventional loans.

VA loans, backed by the Department of Veterans Affairs, provide significant benefits for eligible veterans, service members, and their surviving spouses, including no down payment and no private mortgage insurance. Retired veterans are eligible to use VA loans, provided they meet service requirements and the lender’s income and credit criteria. While VA loans typically do not have a mandatory reserve requirement for single-family homes, lenders may impose their own guidelines. The income used for VA loan qualification, including retirement income, must be expected to continue.

A reverse mortgage is a specific financing option that allows homeowners, typically those aged 62 or older, to convert a portion of their home equity into cash. Unlike a traditional mortgage where the borrower makes payments to the lender, with a reverse mortgage, the lender makes payments to the homeowner. The loan becomes due when the last borrower leaves the home permanently, sells it, or fails to meet loan terms, such as paying property taxes and insurance. This option requires no regular monthly mortgage payments, but the homeowner retains title to the property and remains responsible for ongoing homeownership costs.

Long-Term Homeownership Costs

Beyond the initial purchase and mortgage principal, homeownership involves several ongoing financial commitments that retirees must budget for. Property taxes are a recurring expense, typically levied annually by local governments based on the assessed value of the home. These taxes can vary considerably by location, often ranging from 0.5% to over 2% of the home’s value each year. Homeowners insurance premiums are a mandatory cost, protecting against damage from perils like fire, theft, and natural disasters. The national average cost for homeowners insurance is approximately $2,100 to $2,600 per year for a $300,000 dwelling limit, though this can fluctuate based on location, home characteristics, and coverage choices.

For properties within planned communities, homeowner association (HOA) fees are a regular expense. These fees cover the maintenance and improvement of common areas and shared amenities like landscaping, pools, and clubhouses. HOA fees vary widely, but they commonly range from $200 to $400 per month, with some luxury communities or condominiums having higher costs. Special assessments may also be levied by HOAs for major repairs or unexpected expenses not covered by regular dues.

Home maintenance and repairs can accumulate substantial costs over time. This includes routine upkeep (e.g., lawn care, cleaning) as well as unexpected repairs to systems like plumbing, HVAC, or roofing. A common guideline suggests budgeting 1% to 4% of the home’s value annually for maintenance and repairs, though this can be higher for older homes. Utility costs, encompassing electricity, natural gas, water, sewer, and internet, also contribute to monthly expenses. The average household utility bill in the U.S. can range from $400 to $600 per month, depending on factors like home size, local climate, and usage habits. Planning for these ongoing costs is important for sustainable homeownership.