We asked Dale Baker, president of home lending at KeyBank in Indianapolis about the challenges of buying a home when you’re retired.
“There are multiple factors that can stand in the way of seniors who are either retired or in the process of retiring from being able to quickly and easily purchase the home they want,” Baker wrote in an email. “The most complicated hurdle is seniors who have all the assets they need, but no income streams to make it through the regulations put in place to verify what they qualify for.”
Even retirees with $1 million or more saved for their post-work life can find it difficult to qualify for a loan.
“That money needs to be generating income, dividends or interest to help show that it does function as income,” Baker wrote. “Unfortunately, capital gains on investments are not typically eligible for use as qualifying income due to the one-time nature of the income. Be sure to talk to a lender about how certain assets, set up for regular, periodic distributions, can be used as proof of income.”
Without monthly income that can be confirmed by a bank, qualifying for a loan can be challenging. Lenders must follow regulations that require proof that borrowers have the ability to repay a loan through their planned income, which can sometimes be a surprise for seniors making the transition into retirement.
“I witnessed one situation where a person close to retirement had a difficult time acquiring their new retirement home as they were trying to get their income confirmed,” wrote Baker.
“When they submitted their application, they were still employed,” he added. “They didn’t tell the bank they were retiring in two months. Through the verification process, the bank learned of the coming retirement and that the buyer was just going to have Social Security as an income flow after retiring, so their future income didn’t match the current income when they applied. This was a big red flag and it’s a lesson for buyers to make their lender aware of any upcoming changes before the income verification process begins. It is worth noting that Social Security income can be grossed up for qualification purposes, but you’ll want to talk to your lender about the specifics of doing so.”
Some retirees may plan to sell their current home and pay cash for their next property, but Baker suggests looking carefully into the pros and cons of that plan.
“It can be worthwhile to meet with a financial adviser to determine whether it’s worth taking out a mortgage,” Baker wrote. “With rates so low, buyers with cash flexibility have the option to invest their money elsewhere if that investment could return more money than the interest on a mortgage. It’s also worth factoring in the potential tax breaks involved if you do obtain a mortgage, rather than paying outright for a home. Most lenders have experienced advisers who can crunch the numbers on this scenario to see if it can save home buyers money.”
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