Most mortgage loans are made to people who are still earning income from a job. It can be tough for retired people living on retirement savings to get approved for a mortgage. An asset-based mortgage (ABM) could be a good way to finance homeownership later in life.
Mortgage qualification challenges for retirees
Mortgage companies that are not experienced in helping retired people can be fresh out of ideas when a retiree applies for a mortgage.
Typically, retired people are asset-rich but income-poor — they have accumulated sizable retirement investment accounts but have income that is significantly lower than it was during their working years. Typical mortgage qualifications focus primarily on income as the measure of a borrower’s ability to make monthly house payments, with less attention paid to how much the applicant has in savings and investments. The retiree has no salary, no pay stubs, no W-2s and no letter from an employer to reassure the lender. He may be living on a combination of Social Security and withdrawals from a 401K, but to the mortgage banker, the retiree’s income appears insufficient to pay back a loan.
This situation may leave retirees feeling they have no choice but to liquidate a large portion of their retirement savings so that they can put more down or buy a house outright for cash. But this could result in a substantial tax bill for the retiree.
Fortunately, some mortgage lenders understand that retirees can indeed be a good credit risk and take the size of their retirement funds into account. Enter the asset-based mortgage.
ABMs recognize retirement assets like 401K balances as potential income. If the retiree has already begun drawing upon retirement accounts, the lender can approve a mortgage where the combination of those assets plus Social Security is sufficient to comfortably pay the mortgage. If the retiree has not tapped into retirement accounts yet, the lender analyzes the potential future income from those assets and the resulting ability to repay the loan. Like any other borrower, the retired applicant must still have a good credit score.
This method should seem obvious, but not all lenders perceive the imputed value of large retirement holdings as future income.
Fanny and Freddie
When you as a retiree shop for a mortgage, look for lenders that are experienced with ABMs backed by the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae).
The requirements are stringent, but it is possible to get a mortgage from these programs if you have enough in 401K, Roth and IRA accounts. Programs use differing approaches to determine whether the retiree qualifies for a loan. Some take the approach of evaluating monthly distributions from retirement accounts and, if those plus other income are sufficient to pay the loan and will continue for at least three years, treat them as equivalent to income. Where the retiree is not yet drawing on his retirement accounts, some programs treat the balances of those accounts as money that will be available to pay off the loan. Having Social Security or pension income and equity from the sale of a previous home to roll into the new purchase helps with approval.
As with any other consumer decision, shop several lenders to find ones that are familiar with these programs and offer attractive interest rates and other terms.