Personal Finance

Retired and house hunting? How to finance your next home purchase

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Retirees who are considering a move that involves buying a home may want to consider how they’d finance the purchase.

It can be tricky for seniors to get a mortgage in retirement, said Al Bingham, a mortgage loan officer with Momentum Loans in Sandy, Utah. Not only are lenders still more cautious about extending credit during the pandemic, retirees generally have left a steady paycheck behind.

“You can have a lot of money but show very little income and have difficulty qualifying for a mortgage,” Bingham said. “It frustrates a lot of them.”

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And although interest rates are still very low, they’ve been creeping upward. The average interest rate on a 30-year mortgage is about 3.25%, while for a 15-year fixed-rate mortgage, it’s about 2.5%, according to Bankrate.

Combined with surging home prices and limited inventory, the situation may be even more challenging for retirees, Bingham said. This means it can be worth doing some strategizing and planning ahead.

Of course, the typical aspects of qualifying for a mortgage — such as having a good credit score and monthly debt that isn’t too high — would apply, as well.

The specifics will depend on the lender and the type of mortgage you’re seeking. Loans that are backed by Fannie Mae and Freddie Mac come with requirements that lenders must adhere to, while private mortgage lenders may have their own set of standards.

Qualifying based on income

The most common way for retirees to get a mortgage is by qualifying based on income, said certified financial planner Daniel Graff, a principal and client advisor at Sullivan, Bruyette, Speros & Blayney in McLean, Virginia.

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, your 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.

You can have a lot of money but show very little income and have difficulty qualifying for a mortgage.

Al Bingham

Mortgage loan officer with Momentum Loans

The idea is that you take distributions to help you qualify for the mortgage, even if you don’t really 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.

And, under rollover rules applying to retirement accounts, you can put the cash back within 60 days without the distributions being taxable. Beyond that time frame, however, the withdrawals would be locked in and you’d owe income taxes on the money.

Meanwhile, the lender would see the income on your bank statements, where the money came from and when it hit your account.

Graff said he helped with two mortgages for clients last year that involved taking distributions from an IRA for two months so they could qualify and then returning it under the 60-day rollover rule.

However, he said: “My mortgage lenders are telling me that they are getting a bit more strict on the historical verification, which may restrict this opportunity in the future.”

In addition to seeing verification of the required income, lenders will want to be sure that the distributions can continue for at least three more years, Graff said. 

Alternatively, you could potentially qualify for a mortgage based on your assets in a brokerage account or IRA. Essentially, the lender applies a formula to the money in your account — generally 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.

“In this scenario, the underwriter is not looking directly for a taxable transfer from an IRA to a bank, but a statement of assets that allows [the lender] to be comfortable that a certain amount could be withdrawn each month,” Graff said.

Non-mortgage loans

There are a couple of alternatives that are similar to each other but have subtle differences.

The first option is to take a so-called margin loan on your brokerage account to help fund your down payment or part of the purchase. Basically, brokerage firms may lend you money against the value of your portfolio — called borrowing on margin — whether you use the money to purchase securities or something entirely unrelated to investing.

While such loans come with risk of a “margin call” — you could be asked to add money to your brokerage account if the value falls below a certain amount — the interest rates on margin loans are generally more favorable than those for mortgages or other types of borrowed money.

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