Getting a Mortgage in Retirement: What Does It Involve?

A retirement mortgage caters to seniors who are no longer earning a regular salary. It allows them to access home equity or finance a home purchase with repayment terms that are tailored to their retirement income. Lenders will assess these mortgages based on the borrower's retirement income, credit history and the value of their assets, including home equity.

If you are considering a retirement mortgage, a financial advisor can help you determine how this type of loan fits into your overall financial plan.

Is It Possible to Get a Mortgage as a Retiree?

Yes, provided that lenders can see enough proof that you can make regular payments. They will also want to evaluate all sources of income to determine your ability to repay the loan. Retirees can draw from IRAs, 401(k)s or annuities to provide additional income to meet lender requirements. However, there are tax implications, so consider consulting a tax professional or financial advisor before doing this.

Lenders also assess the retiree’s debt-to-income (DTI) ratio , which compares monthly debt payments to gross monthly income. A lower DTI ratio and a strong credit score indicates better financial health and increases the chances of mortgage approval. Retirees should be prepared to discuss their health status and provide evidence of sufficient savings or insurance to cover potential healthcare costs, as lenders may worry about long-term financial health. Demonstrating a comprehensive financial plan that addresses these concerns can reassure lenders. Proof of income is often established by preparing statements for the following:

• Withdrawal statements from your 401(k) or IRA
• Annuities
• Social Security, disability, or veteran's benefits
• Pensions
• Stock dividends
• Savings interest

Types of Mortgages Available to Retirees

Just as with other financial decisions, retirees should shop around for the best mortgage terms. Different lenders can offer varying rates , fees and qualification criteria. Here are four types of mortgages that retirees can choose from:

• Conventional mortgages . These loans are not insured or guaranteed by the federal government, often requiring a higher credit score and a more substantial down payment. They offer fixed or adjustable rates, providing flexibility for those with stable retirement income.
• Jumbo mortgages . These loans exceed the conforming loan limits set by the Federal Housing Finance Agency (FHFA). Jumbo mortgages typically come with stricter credit requirements and higher interest rates, a viable option for those with significant assets or high income.
• FHA mortgages . Federal Housing Authority (FHA) mortgages are easier to qualify for, making them an attractive option for retirees. These loans have lower credit score requirements and down payments, but borrowers must pay mortgage insurance premiums .
• USDA and VA loans . Retirees in rural areas may qualify for USDA loans, which offer low-interest rates and zero down payment options. Similarly, VA loans with favorable terms are available to retired veterans.

Alternatives to Retirement Mortgages

Alternatives to retirement mortgages can include reverse mortgages, downsizing, home equity loans and using retirement savings or investments to fund housing needs. Here's a closer look at four common options:

• Reverse mortgage. Unlike a regular mortgage, reverse mortgage payments are not made to the lender. Instead, the lender makes payments to the homeowner, either in a lump sum, monthly payments, or a line of credit. However, the loan must be repaid when the homeowner moves out or passes away, which could affect inheritance plans.
• Home equity. A home equity line of credit (HELOC) provides a revolving line of credit so retirees can borrow, repay and borrow again as needed. Interest rates are generally lower than those of credit cards, making it a cost-effective solution for covering expenses during retirement. There are also home equity loans which allow retirees to borrow against their home equity. However, it differs in that the loan is provided as a lump sum with fixed interest rates and payments.
• Cash-out refinancing. Cash-out refinancing provides extra cash by tapping into home equity. This option replaces the existing mortgage with a new one, which lowers monthly payments if interest rates are favorable and offers a lump sum payment.
• Cosigner. Having a cosigner on a loan can improve the chances of approval and better terms. This arrangement requires a strong, trusting relationship, as the cosigner is responsible for the debt if the retiree cannot make payments.

Tax Relief

Seniors may be able to take advantage of  exemptions, reductions, or deferrals on property taxes, which aim to make homeownership more affordable during retirement.

Various states offer tax breaks for seniors that depend on age, income and residency. Benefits can also include higher standard deductions and tax-free income from certain retirement accounts.

Bottom Line

Retirement mortgages come in many shapes and sizes, but retirees need to demonstrate that they have steady income and long-term financial stability in order to satisfy lenders. Cash-strapped retirees can also explore refinancing options, using their existing home for equity or enlisting the help of a cosigner. The U.S. government may also provide tax relief or favorable loans through the USDA, FHA, or VA. Ultimately, retirees may want to consult with a retirement advisor to talk over what options might work for their financial plan.

Tips for Mortgages

• A financial advisor can help you determine which type of mortgage fits your financial plan. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• To estimate how much you might need for a mortgage, consider using SmartAsset's free mortgage calculator .

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