Pre-retirees who are thinking about changing their primary residence after they retire and who will need a mortgage to do so may benefit from making the move while they are still working.
That will not always be possible, of course. If, for example, retirement plans include selling the house in New Hampshire and moving to Florida – but work remains in New Hampshire – there is no moving early unless an employer allows for working remotely.
But near-retirees who do not plan to move far from their current residence – perhaps because the main reason is to get a smaller home – should consider getting a loan for that home while they are still working. Qualifying for the mortgage will likely be easier and they may be able to borrow more.
The importance of income
Lenders cannot discriminate against borrowers based on age, and they do not care, per se, whether an applicant is working or retired. What they care about is:
- Whether an applicant has the income to repay what they are asking to borrow.
- Whether existing debt could interfere with making the proposed loan payments.
- Whether the applicant’s credit history shows that they are a responsible borrower.
After retiring, borrowers cannot simply provide copies of W-2s, the tax forms that show annual employment earning earnings, to prove that they have the cash flow to repay the loan. Instead, they have to show that Social Security, pension, and retirement account income and assets will be sufficient to repay the loan.
Qualifying with Social Security and pension income is simple enough but qualifying with retirement account income and assets from accounts like 401(k)s and IRAs can get tricky. Retirees need to be taking regular withdrawals from these accounts that are high enough to support their proposed housing payment, or they need to have enough untouched assets in these accounts to qualify under asset depletion calculations.
Applying while working can mean a larger loan
Different lenders use different formulas to turn a retiree’s untapped assets into qualifying income for a mortgage. While working, you can qualify for a mortgage based on your pre-tax salary. Lenders typically will not care about retirement account balances because you have enough current income to repay the loan you are applying for.
Words of caution
Retirees commonly carry credit cards, automobile loans, and sometimes even student loan debt. At age 65, retirees can expect to pay some amount, sometimes several hundred dollars depending on income level, for Medicare coverage. These are other factors that lenders may consider when applying for a loan.
Borrowers should carefully consider, however, whether it makes sense to borrow based on their retirement income if they expect their post-retirement income to be lower. Why add financial stress to the other challenges of retirement by taking on too much debt? The goal is not to borrow as much as possible, but to enjoy a comfortable retirement.