Most adults who are approaching retirement or who have reached this stage in their lives are aware that income is a major factor that mortgage underwriters focus on when applying for a home loan. The primary source of income that working adults have usually is from their full-time employment, and some income may also be derived from investments, royalties or other sources. After you retire, however, you do not have a job, and you may think that you cannot qualify for a home loan because you do not have salaried income. The good news is that this is not the case. There are actually several methods that underwriters can use to qualify you for a home loan after you have retired from a full-time job.
The Drawdown Method
You obviously are receiving some type of income after you retire1 because you have to pay your bills. If this income is a drawdown from your various investment accounts, you can prove this source of income by providing your bank statements. The bank statements should ideally show the same amount being deposited into your account each month. Some underwriters may also need a letter from your financial institution confirming this drawdown arrangement. Keep in mind that this is only one source of income that underwriters may consider. For example, if you also receive rental income from a real estate investment, Social Security income, or any other type of income, all sources of regular income that are expected to continue can be counted in the underwriter’s analysis of your loan request.
The Asset Depletion Method
If you are using capital assets2 to pay for your retirement, the underwriter can consider this as a source of income, as well. For example, if you currently have $2 million in liquid assets, an underwriter may use 70 percent of this amount. Then, the underwriter will divide that amount by the number of monthly payments you desire for your home loan. If you apply for a 30-year loan, the figure will be divided by 360 months. If you have additional sources of income, such as from other investments or a pension, this income will also be included in the income calculation. This is a suitable method that can be used for retirees who have a lot of assets but who may not have a significant amount of income rolling in.
Other Important Qualification Requirements
Income is not the only qualification requirement that underwriters review when you apply for a new home loan. Just as is the case if you apply for a home loan at an earlier stage in your life, your credit scores are critical. They can play a role in your approval status, as well as determining your interest rate. Ideally, your credit scores3 should be in the high 700s to qualify for an excellent rate. Underwriters will also review your plans to live in the house or to lease it out, your down payment amount, and your available liquidity after closing. Tax returns, bank statements, documents showing other sources of income, your credit report and other items will all be analyzed closely by the underwriter.
You can see that qualifying for a home loan after you retire is possible, but it also can be confusing. A smart idea is to reach out to a lender or mortgage representative who can help you learn more about your ability to obtain a mortgage in retirement through a consultation and prequalification process.