Retirement comes in many forms and looks different for each person. For one person, retirement means extra income while working another job. While another looks at retiring as a time to relax, enjoy the grandchildren, and travel. Additionally, retirement age may come at ages 38, 59 1/2, 62, 65, or higher. Not only can retirement come at different times such as early retirement or social security retirement age, but the income types vary. Retirement income types include:
- Military pension
- Social security
- Disability income
- 401k, IRA, SEP, Keough
- Traditional retirement or pension income
When it comes to retirement income, many current or soon to be retirees wonder how it will impact buying a home. Furthermore, there are many misconceptions. One such example includes being too old to borrow a 30-year mortgage.
Retirement Income Myths
Whether talking about a 40-year-old retired service member or a retired 85-year-old, buying a house brings forth several misconceptions. Retirees deserve every reasonable opportunity to buy a house, and there are great opportunities available, but first, the retirement population needs to realize that some thoughts are merely misinformation. Some of the most common myths circling around while home shopping or during mortgage qualification include the following:
- Too old to get a 30-year mortgage
- Lenders only count retirement income or employment income
- They must have a two-year retirement history
- Lenders only use net income for qualification
- Disability income cannot be used
Now, let’s explain why these are wrong. It is possible to move toward buying a home with the correct information.
Retirement Income Myth #1: Too Old for a Mortgage
First of all, a borrower does have to be at least 18 years old to get a mortgage, but when it comes to a maximum age for a mortgage loan, there is none. If a lender withholds loan approval based on the client’s age, this is considered discrimination. With that said, A 100-year-old buyer may close on a 30 year fixed rate loan. Shoot, a retiree could even choose an adjustable rate mortgage. Sure, chances are the 100-year-old borrower would not live to be 130, yet that cannot be a reason for denial.
Pay Off Mortgage Fast
Some may wonder why a retiree late in years would want a longer-term mortgage. It is a great question, and the right answer depends on the retired borrower’s goals and scenario. Maybe a retiree has sufficient income, and the goal is to pay off the mortgage at an accelerated rate so that a free and clear home can be left to heirs. If that is the goal, the borrower qualifies for a shorter term, and the shorter term does not put undue stress on the retired person’s finances, it could certainly be an option.
Long Term Mortgage Has a Lower Payment
Contrary to paying off the balance quickly, another school of thought is to have a lower mortgage payment in retirement. By having a longer-term mortgage with a lower payment, it allows a retired borrower to experience a better cash flow in later years. At least when comparing a short term to a long term loan. Thus, this goal is to live more comfortably in a budget and not worry about throwing significant extra funds toward paying off the house.
Either way, retirees have the right to choose any available loan term as long as they meet the loan qualifications when it comes to debt to income ratio and others.
Retirement Income Myth #2: Choosing Only One Income
Let’s assume a buyer just retired, and a new retirement income has begun. Meanwhile, the borrower starts another job. Can a lender count both income sources? Almost always, yes. This is different than a buyer that has a primary job and then adds a brand new second job. In that case, a buyer must have a history of holding two jobs at once, but when it comes to counting retirement and a job, it is usually permitted. The reason is there is only one job. The retiree is getting paid retirement with no requirement to work. So, if the buyer has a history of working a job, then the new job after retirement should be counted.
Keep in mind; the income may not count in certain circumstances. For instance, brand new 1099/self-employment requires a history. Going from no recent employment history to starting a new job creates a problem as well. Generally, both a retirement income plus a job may count.
Retirement Income Myth #3: Must Have a Two Year History
As long as the income has officially started, it counts (in most cases). Although, there may be a requirement to prove at least the first month’s receipt of payment. This includes many forms of retirement. Retiring from the military involves a military pension and possibly a percentage of VA disability income. Count it right away. Receiving Social Security retirement or disability income is counted immediately. A brand new full or early retirement pension counts.
Even though history is not required for retirement income, there are potential cases where proof of continuance is needed. If a new IRA or 401k distribution is set up, proving that it must reasonably continue for three more years is required. The reason is, this income is based on an asset, and that asset could expire. The typical mortgage lender calculation is dividing the retirement account balance by the monthly income. Thus, the goal is to make sure the answer exceeds 36 months.
Retirement Income Myth # 4: Qualify Only on Net Income
Typically, retirees only care about their net income. How much goes into the bank account each month rather than the gross amount. Therefore, when a lender asks for a retired person’s income, the answer is usually the net or take-home pay. Even when asked for the gross amount, the answer is either the net or the borrower does not know. This makes perfect sense because the retirement community sets a budget on their net amount deposited in the bank. Why start with the gross, take out taxes, insurance, or Medicare, and then figure a budget?
That is why many believe lenders only count the net income. By good fortune, lenders count the gross retirement income! Figuring the gross income means looking at the highest monthly figure. On the social security award letter, look at the top figure before any deductions. For retirement, use the figure before any income tax or other deductions.
Grossing Up Nontaxable Income
There are even times to use higher than the gross income. When and why would this happen? Well, since lenders use the gross taxable income for qualifying and some incomes are not taxed, borrowers with this nontaxable income are shortchanged. As a result, incomes such as social security disability, VA disability, and other nontaxable incomes like housing allowances can be “grossed up.” “Grossing up” income means to multiply the income by a certain percentage. When this takes place, it puts the income on the same level as other taxable income and helps the borrower qualify easier.
25% is the most common gross-up percentage, although FHA uses 15%. For easy math, a $1,000 per month nontaxable income would qualify at $1,250 or $1,150 depending on the program type.
Additionally, VA loans allow for a potentially higher gross-up percentage. A knowledgeable VA lender figures this calculation. In the end, do not short change yourself. Have a detailed discussion and use the gross income. If not sure of the amount, pull out your paperwork, or reach out to the organization paying you.
Retirement Income Myth #5: Disability Income Cannot Be Counted
Old mortgage rules required disabled borrowers to get proof that the disability income should continue for three years. It was a standard requirement for borrowers to obtain a letter from a doctor stating “the disability is expected to continue at least three years.” Some disabilities are permanent and others you do not know. Either way, disabled borrowers are a protected class, and requiring proof of continuance is not allowed. So, incomes like social security or VA disability are assumed to continue. Lenders should not ask for proof of continuance in these cases. Just prove the income amount and that it is received.
As stated in myth #4, this nontaxable income may even be grossed up, to count as income.
Hopefully, this article has debunked any mortgage qualifying rumors you’ve heard. Furthermore, a retiree should now have a better understanding of how mortgage lenders treat retirement income. Do you have questions about qualifying with a retirement income? Contact an OVM Financial loan officer now.