Will retirement come with a move? Or will real estate be your income-generating retirement side hustle? Whether you’re downsizing, moving to a new location, or investing, retirees often find themselves in need of a mortgage to make their retirement plans come to fruition.
This may have seemed like no big deal during your working years. But securing a mortgage takes a bit more effort when you’re retired, even if you have full confidence in your ability to cover the new monthly payments.
Debt to Income Ratio
There’s a misconception amongst retirees investing in real estate. Many believe their assets, net worth, or other collateral will be enough to secure a mortgage. You’ve managed to confidently retire after all, how hard can it be?
The problem is your debt-to-income ratio often greatly changes when you’re retired. The debt-to-income ratio is factored as a percentage. Debt / Income = Debt-to-Income Ratio.
When factoring in the debt component, you need to factor in all monthly debt payments, not just the mortgage payment. And it’s important to remember co-signing for loans can also count as debts tied to your name.
While lenders and scenarios differ, 43% is the common target ceiling for qualifying individuals for a mortgage. The higher your percentage, the more risk you pose to the mortgage lender. Keep this number in mind as a rule of thumb while you’re real estate shopping.
Won’t Social Security Cover My Needs?
Consider the timing of your real estate purchase. For many, it’s within the first few years of retirement. Because the federal government rewards retirees for pushing back their first social security withdrawal with a higher monthly payment, many new retirees aren’t yet collecting social security.
And if you retire early, you may not even qualify for social security yet. And while every situation is unique, most will try at a minimum to reach their full retirement age before collecting social security. The current full retirement age is 67-years-old for those born in 1960 or later.
Even if you are collecting social security, it’s often not enough. For these reasons, many will begin withdrawing from an IRA or other retirement savings. If you’re 59.5 years old, you can pull money from your IRA without penalty.
Plan Ahead
If you’re used to making purchases and decisions on a whim, you may need to adjust your mindset. Planning is the best way to offset frustrations associated with roadblocks you may hit in these scenarios.
At the end of the day, mortgage lenders want to see consistent income coming in each month that provides a relatively low debt-to-income ratio. Two months is often the time frame lenders review. By planning, you can withdraw from an IRA during the months leading up to your real estate purchase.
Once your loan is secured, you can adjust your distributions how you best see fit to cover your new mortgage and other expenditures.
Type of Property
Now you may be thinking – but this is a second property, or an investment property, or I’m downsizing to a smaller home. Even in these varying circumstances, showing consistent income deposits into your bank account for a minimum of 2 months leading up to the purchase is across the board, your best bet for securing a mortgage with ease.
The primary difference you may find in securing a mortgage for these varying scenarios is the down payment requirements. Not meeting certain down payment thresholds can land you with a higher monthly payment if the lender requires private mortgage insurance (PMI).
Gaining access to your bank records is easier than ever with the capabilities of online banking. Be prepared to provide bank statements and receipts of payments during the mortgage application process.
Organize Your Timeline
While you can see a bit of planning may be required to secure your mortgage, there may be other pieces to the puzzle. Determining if and when to invest in real estate isn’t always simply answered.
Your real estate endeavors should be intertwined into your all-encompassing financial plan. Working with a financial advisor is a great option as you add levels of complexity to your personal finances. They can help you navigate life decisions while considering taxes, regulatory timelines, and your personal goals.
The professionals at Integrated Wealth Management have helped many retirees navigate their way to a new mortgage. If you’d like a hand from a trusted professional, reach out to us at 302-442-4233 or send us a note.