Understanding mortgages after retirement: Here’s what to know

November 28, 2023

U.S. Bank Mortgage Loan Officers Susan Brown and Melany Hannibal share their tips to help as you consider a mortgage after retirement.

Retirement gives you the freedom to change your lifestyle, including moving to your dream home. But how do you make your goals reality if you want to move and don’t have enough equity or savings to cover the cost of a new home?

Maybe you’re an empty nester and need to downsize to a smaller space. Perhaps you want to move closer to family, friends or to a different area to take advantage of specific amenities—think beach community, mountain cabin or a swanky loft apartment in your favorite downtown metropolis.

Or perhaps you’re seeking to downsize, using the equity in your home to buy a smaller property and save the surplus funds for other expenses in retirement. This is the perfect opportunity to move from a two-story home to a one-level ranch. Here are some things to consider before obtaining a mortgage after retirement.

Start with the basics: How does a mortgage after retirement work?

You’ll notice mortgages after retirement are just like any other home loans; it’s a type of loan that is taken out by a retiree to purchase a home or other real estate. The loan is typically secured by the property being purchased, meaning that if the loan is not repaid, the lender can take possession of the property. The terms of the loan will vary depending on the lender, but typically the loan is paid back over a period of years and requires regular payments.

Decide if this will be your primary residence

As a retired person, you likely have more flexibility to live wherever you wish. However, there are some considerations to keep in mind when deciding if you will live at the property full time or part time. For example, you may be planning to buy a beach condo to escape cold winters and return to your primary home to spend summers with your grandchildren.

“When you apply for a mortgage, the type of property – primary home, second home or investment property – you’re financing will impact the interest rate offering,” says Susan Brown, U.S. Bank Loan Originator NMLS 222940. “Typically, interest rates are lower for primary residence occupancy types and can provide savings for the life of the loan. 

“Also, your occupancy designation affects the down payment requirements, with a primary residence requiring a lower down payment requirement than a second home or investment property.”

Check your credit score

Brown says maintaining a high credit score is even more critical upon retirement since you probably have less steady income than when you were working full time. The better your score, the more optimal the interest rate offering will be.

When applying for a mortgage loan, the lender will review your credit score and credit profile to determine if mortgage financing will be approved. Since this is a key factor in your ability to be approved, you should monitor your credit profile in preparation for applying for mortgage pre-approval.

There are many ways to boost your score, helping you get the best financing terms available. It’s best to speak to a mortgage loan advisor to assess your credit profile. If you want to educate yourself prior to speaking to a professional, the U.S. Government provides resources to consumers such as this tool.

Consider your income and debt-to-income ratio

Melany Hannibal, U.S. Bank Home Mortgage and Wealth Mortgage Banker, NMLS 502019 says lenders want to be sure you have money to live on beyond just paying your mortgage. Your debt-to-income ratio (DTI) is the percentage of your monthly income that goes toward paying your debts.

To calculate how much you can afford, the lender will consider your income, debt and expenses, amount of savings available and credit profile. Most lenders ask for proof of income over the past two years, including pension and Social Security payments as well as any investment dividends or earned interest. 

“You need to be able to pay for things like utilities, a car payment, gas, groceries, clothing and entertainment,” Hannibal said. “The maximum debt-to-income ratio for loan programs is 50% of the total income received. This includes credit, mortgage payments, taxes, insurance and homeowner association (HOA) dues.”

The amount of income in relation to the debt load helps a lender decide how much you can borrow. The lender reviews the financial profile, including the DTI, of the borrower to determine if they can manage the payments and repay the loan. 

Additionally, purchasing a home that fits comfortably into your budget can help ensure living there and maintaining the home is sustainable regardless of what life throws your way.  If you’re curious about what you can afford before you meet with a professional, this tool can help you estimate an approximate amount.

What other factors do I need to consider with my lender?

Being retired, you may have income sources that the lender will consider such as social security, pension, retirement distributions, investment income, annuity, spousal benefits as well as your assets when deciding if your eligibility for a mortgage.

Hannibal says that applying for a loan with a spouse or partner can also impact the rate and approval.

“Each borrower’s income and debt impacts their purchasing power and eligibility,” Hannibal said. “Also, the credit score of each person can change the interest rate the couple receives. Your mortgage professional will help facilitate getting a preapproval for a loan before you begin looking at homes with a realtor and planning for the required savings and cash reserves.”

Why is it important to get a preapproval before meeting with a real estate agent?

“It helps you have realistic expectations of what you can afford,” Hannibal said. “I recommend applying for a preapproval 90 days prior to when you want to buy. Credit is good for 120 days so if you pull a report sooner, it will expire.”

What options do I have if I’m unable to get a traditional mortgage loan?

“Many borrowers can take out a margin loan on their assets,” Brown said. “If this is something you’re interested in looking into, you should check with your financial advisor and mortgage loan specialist for the current rates and your ability to borrow.”

If retirement in a new home awaits, reach out to a mortgage loan officer near you to help make it happen.

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