Showing income to qualify for a mortgage can be more complicated when you're retired, but there are some strategies.
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Getting a mortgage in NYC when you’re retired can be complicated—just consider what Arthur and Ginny Walzer, a retired couple, went through when they were trying to buy a co-op in Brooklyn: Their lender reneged on the mortgage three business days before closing. Talk about stress!
Although a reason was never given, Arthur thinks it was because they were considered unable to meet their mortgage payments, a calculation that was based just on his wife's pension and their social security. It didn't take into account his retirement funds, which he says amounted to more than the value of the mortgage.
When looking to refinance or purchase when you're no longer working, “retirement income can be considered for income as long as it is stable and predictable,” says Brittney Baldwin, a vice president at National Cooperative Bank (a Brick Underground sponsor). This can come from sources like social security, your pension, and retirement funds but money invested in a volatile stock market isn't always ideal, even though the capital might be substantial.
“If we are looking to qualify a borrower we have to make sure the borrower can support all of their monthly expenses on the documented income being received," Baldwin says.
Banks also need to see that you are receiving payments from the funds you have. If you've taken no money from the retirement funds available to you and can't show capital gains, it may be more difficult to qualify, says Eli Sklar, senior loan consultant at loanDepot.
If you're considering buying in your retirement, there are some workarounds.
An asset dissipation or asset depletion loan
With an asset dissipation loan (also called an asset depletion loan), instead of using your income to qualify for a mortgage, you may be able to use an assessment of your assets to secure the mortgage. Sklar says this type of loan is very common for people who are retired. However, if your account is made up of stocks and bonds or mutual funds, lenders will typically only consider a percentage of those assets as part of the calculations—usually between 60 and 70 percent.
"You use a percentage of that asset, amortized over the life of the loan and use that as income," Sklar says. It helps if you can also show that you can draw on the assets without penalties in the years ahead.
The way banks look at assets varies. Melissa Cohn, executive mortgage banker at William Raveis Mortgage, says in a best-case scenario, a bank might let you take your post closing assets and divide it by 36 months to come up with an income figure. In a worse case scenario, you might have to divide it by 360 months. "How much income you can show from your assets can vary dramatically from bank to bank," she says.
Using IRA distributions
If you're getting a mortgage backed by Fannie Mae and can show you are taking distributions from your Individual Retirement Account (IRA) for the next 36 months, you can use those funds as income.
For example, if you have $350,000 in your IRA, a bank can use these funds to calculate an income. Typically they'll divide the number by 36, which in this case would give a borrower a monthly income of $9,700. This can be used to secure a mortgage. "For the banks that will allow it, it's a great way to help retirees get mortgage financing," Cohn says.
If you are yet to take any IRA distributions, you will generally need a letter from your stockbroker or investment manager stating that you've elected to take the distribution and it will be taken going forward. Cohn points out mandatory IRA distributions were waived in 2020 due to the pandemic.
Lenders vary
If you're retired or are planning to retire you might find the big retail banks are less flexible when it comes to approving your mortgage. Using an independent mortgage broker can give you more options. "Big banks are very black and white, there's no gray," Cohn says.
As a broker, Sklar says he's able to tap into a program that if he shows a borrower has twice their aggregate financing, they can often qualify for the mortgage. As well as retirees, this can help someone who isn't getting a regular income, perhaps because they are transitioning from employee to self-employed status.
"If you have twice the aggregate financing, you're unlikely to default," Sklar says.
When the Walzers' original funding fell through, they was still able to buy the co-op because they had funds in an asset portfolio. However, they wanted to take advantage of the borrowing environment. Post-closing, Arthur says he was able to borrow from a local lender in the New York metro area "without much difficulty."
Non-occupying co-borrower arrangements
Another buying option is to have a family member or relative co-sign the mortgage for you. "There are banks that will allow you to have non-occupying co-borrowers," Cohn says.
In this situation, you would apply for the mortgage but the relative would be a co-borrower on the agreement. The co-signatory would use their income and assets to help you qualify. The caveat here is that a co-op board might not allow this type of arrangement.
Co-op requirements
Co-op boards in NYC have notoriously steep financial requirements so getting board approval when you're retired is usually more difficult than qualifying for a mortgage. "The buildings have much stricter guidance in terms of debt to income ratio," Sklar says.
In the Walzers' case, co-op board approval didn't mean the mortgage was assured. However, the fact that they was able to get the mortgage once they closed underlies the importance of shopping around to make sure you get the right lender for your circumstances.
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