How to finance your next home purchase if you’re retired

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Retirees who are considering a move involving to buy a house may want to think about how they would finance the purchase.

It can be difficult for seniors to get a mortgage after retirement, said Al Bingham, mortgage manager at Momentum Loans in Sandy, Utah. Not only are lenders even more cautious about granting credit during the pandemic, retirees have typically left a regular paycheck behind.

“You can have a lot of money but have very little income and struggle to qualify for a mortgage,” Bingham said. “It frustrates a lot of them.”

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

Combined with soaring house prices and limited stocks, the situation may be even more difficult for retirees, Bingham said. This means it may be worth strategizing and planning ahead.

Of course, the typical aspects of qualifying for a mortgage, such as having a good credit rating and monthly debt that is not too high, would also apply.

The details will depend on the lender and the type of mortgage you are looking for. Loans guaranteed 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.

Income-based eligibility

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

Lenders will usually look at the value of your tax returns for the past two years to see what that amount is. This can include, for example, social security, retirement income, dividends and interest.

However, your taxable income may not be enough to qualify for the loan on its own. This is where a retirement account like a 401 (k) plan or an individual retirement account can come into play.

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

Al bingham

Mortgage Loan Officer with Momentum Loans

The idea is that you receive distributions to help you qualify for the mortgage, even if you don’t really need the money. As long as you are at least 59 and a half years old, you can use your IRA or 401 (k) plan without paying a 10% early withdrawal penalty.

And, under the rollover rules for retirement accounts, you can return the money within 60 days without the distributions being taxable. Beyond that time, however, withdrawals would be blocked and you owed income tax on the money.

During this time, the lender would see the income on your bank statements, where the money came from and when it reached 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 them under the rollover rule 60 days.

However, he said: “My mortgage lenders tell me they are getting a little more stringent on historical verification, which may limit this opportunity in the future.”

In addition to seeing the required income verification, lenders will want to ensure that 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 – typically using 70% of the account value – to determine if it can extend long enough to cover mortgage payments over the life of the loan.

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

Non-mortgage loans

There are a few alternatives that are similar but have subtle differences.

The first option is to take out a margin loan from your brokerage account to help finance your down payment or part of the purchase. Basically, brokerage firms can lend you money for the value of your portfolio – called a margin loan – whether you are using the money to buy securities or something that has nothing to do with investing.

Although such loans carry a risk of “margin call” – you may be required to add money to your brokerage account if the value falls below a certain amount – interest rates on margin loans are generally more favorable than mortgages or other types of borrowed money.

“Right now we’re seeing rates at 1.75%,” Graff said.

Additionally, while it would be important to limit the loan in order to reduce the risk of a margin call, it is a way to avoid selling the assets in the account – and paying taxes on the gains – if it does. had been the alternative. And, the loan can stay in place until you pay it back (instead of having a set time limit).

“What I’m seeing is a combination of margin loans and traditional financing,” Graff said.

The other option is to “pledge assets”. It also involves taking out a loan from your brokerage account, and the assets are used as collateral. Yet, unlike margin loans, you cannot use the money to buy securities. There is also a fixed term for these loans.

For example, in Schwab, you can borrow up to 70% the value of eligible assets given as collateral. The longest term for such a loan is five years.

“You could almost use that loan as bridge financing and more carefully plan how to prove the income to the bank,” Graff said.

Note that the interest paid on these loans can often be deductible from portfolio income (interest and dividends).

“It’s not deductible on Schedule A like a traditional mortgage, but in many situations the tax benefits can be similar,” Graff said.

He added, however, that you should consult a tax advisor to fully understand your options.


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