Buying a home in Retirement – Is it Possible?
You no longer have a paycheck, but want to buy a home in retirement. You know you can afford it, but do lenders agree?
Downsizing in retirement may be ideal, but if you can’t pay cash for the home, you may find yourself in a unique situation. Mortgage program restrictions tightened since COVID, putting retirees who were already in a ‘unique’ situation in a tighter spot.
But, it is possible to buy a home in retirement with the following steps.
Your Tax Returns Say it All
Lenders use your tax returns to determine if you can afford a mortgage. The income you claim and the deductions you take determine it. Common income for retirees includes pension, Social Security, and investment income.
If your adjusted gross income is enough to cover the mortgage, taxes, insurance, and other existing consumer debt, you may get approved.
Lenders focus on your debt-to-income ratio, or how much of your monthly income you’re obligated to spend each month. Ideally, your DTI shouldn’t be more than 43%. If your income on your tax returns is high enough, you may get approved easier than you thought.
Qualifying with Assets
Sometimes you don’t have to qualify based on income but can use your assets as a qualifying factor. Lenders use your assets like they would regular income. They make sure the value of the assets covers the total loan term. In other words, they ensure you have enough money to pay for the mortgage without any other income.
When buying a home in retirement lenders typically use 70% of the value of your assets to qualify you for a mortgage. For example, if you have $1 million in assets, they’d use $700,000 for qualifying.
You can qualify using assets by providing proof of your statements and ownership of the assets.
Buying a Home in Retirement: Proving your Income is Stable
Any lender, no matter the program, needs proof that your qualifying income is stable, reliable, and likely to continue for at least three years. If you’re depleting an asset, there must be proof that there is enough money to prove income for at least that long
Applicants must also prove ownership of the assets and lack of penalty for withdrawing the funds. For example, if you’re under 59 ½ years old, you’ll pay a 10% penalty for early withdrawals in your retirement account.
If you receive Social Security income, you don’t have to prove how long you’ll receive it unless you’re drawing on a relative’s Social Security benefits. Since there is an expiration on spousal or children’s Social Security benefits, you must supply your award letter to prove how long you’ll receive it.
Arizona – A Popular Destination for Retirees in the US
About 59,000 seniors moved to the state in 2019 making it the second most popular state as a relocation destination. (Florida was first). This does not take into account part time residents or “snowbirds” that come just for the winter. Though Arizona does not tax Social Security retirement benefits, it does tax distributions from an IRA or a 401(k), making it only a moderately tax-friendly state for retirees.
Making a Home Purchase in Retirement is Possible
You can buy a home in retirement if you do your homework. It’s not as easy as supplying your pay stubs and W-2s, but it’s not impossible either.
Get your paperwork organized ahead of time, know what you can afford, and have proof of ownership of all asset accounts if you’re using any type of asset to qualify versus actual receipt of retirement income.
If you’re considering a move to Arizona contact us today to help to get pre approved. Due to Covid-19 Real estate inventory is tight and bidding wars are common. Being pre approved by a local lender can make all the difference.