Mortgage Tips for Retirees
Sure, your grandma and grandpa may have stayed put once they left the workforce, but you likely have other plans. Now more than ever, it seems retirees are on the move—and buying new homes.
About 18% of homebuyers were younger baby boomers (aged 56 to 65) in 2021. And older boomers (aged 66 to 74) scooped up an additional 14% of the market during the same period, according to a recent report from the National Association of Realtors®.
Buying a new home is a logistical and financial challenge no matter your age (or how many times you’ve done it). But our mortgage and lending system can be especially challenging for retirees to navigate, simply because lenders prioritize income.
To help, we reached out to real estate professionals for tips on how retirees can find their golden years dream home, land a great mortgage, and still have plenty left in the bank for whatever surprises life delivers.
1. Think local
For the most part, retirees who are relocating aren’t looking to move across town but to an entirely different area (usually one with better weather). With that in mind, always work with a real estate professional in your new home state.
“There are a lot of different rules and costs state by state,” says Rachel Lester, an agent with Keller Williams Main Line Realty in Villanova, PA. “And the lending and real estate laws can really differ. You need to make sure the person you’re working with is aware of local transfer taxes and closing costs.”
Also, prioritize working with a local lender, especially in states with rigid contract dates. You also want to make sure your lender is available by phone seven days a week. So beware of lenders you find on the internet, who may offer only 1-800 numbers and limited office hours.
2. Watch your debt-to-income ratio
When you retire, your lack of income may scare some lenders. But if you’re on top of your debt-to-income ratio, you’ll look a lot more financially stable.
“To qualify, your debt-to-income ratio should be lower than 36%,” says Warner Quiroga, president and owner of Prestige Home Buyers in Brentwood, NY. “Debt-to-income is calculated by looking at current expenses, such as car payments, credit cards, student loans, and housing expenses, versus what money you have coming in.”
3. Get creative with your mortgage
Landing a fantastic 30-year mortgage with a low interest rate isn’t so easy when you’ve left the job market and no longer have a steady income.
“But don’t let anyone tell you it is too late in life to buy a home,” says John W. Mallett, founder and president of MainStreet Mortgage, in Thousand Oaks, CA.
Instead, find a professional fluent in many types of mortgages.
“You should consider asset depletion, which entails using savings as income,” says Mallett. “You could also use qualified savings as income, such as an IRA or 401(k).”
Another option is a reverse mortgage, which got a bad rap for many years but can actually be a useful tool for retirees.
“Reverse mortgages require a larger down payment than conventional loans,” says Mallett. “However, you have the option to make no payments, interest-only payments, fully amortized payments, or anything in between. So while reverse mortgages can be complex, you will know if it’s right for you once you understand how they are structured.”
4. Reconsider risk calculations
If you’ve made it to retirement, your likely used to taking risks and thinking long term, especially when it comes to investments. But Todd Huettner, president of Huettner Capital, a mortgage lender in Denver, urges you to adjust just how much risk you’re willing to take when it comes to buying a new home.
“A person’s financial risk jumps to the highest point after retirement and remains very high for another decade,” notes Huettner. “Without the ability to replenish losses with income, any low returns on investments or unplanned withdrawals from a retirement account will severely reduce the amount of money you can safely withdraw in the future.”
With that in mind, Huettner advises pursuing a fixed-rate mortgage rather than an adjustable-rate mortgage, so you don’t risk everything you saved for retirement on variables outside your control, such as interest rates.
5. Crunch the numbers
People live well into their 90s today, so it’s easy to see why many retirees gravitate toward the tried-and-true 30-year mortgage. But before settling on a standard loan term, carefully weigh the costs and benefits of each mortgage term.
A 15-year loan usually has a lower interest rate but requires a bigger monthly payment. On the other hand, a 30-year mortgage comes with a higher interest rate but your monthly payments will be lower.
So look at the total amount in your retirement accounts and calculate the interest you’ll make in savings over 15 versus 30 years. And compare the results to the corresponding mortgage rates and payments for the same time period.
“If you’re taking money from an investment that returns 7% when the rate on the 30-year mortgage is 3.5%, then I would strongly consider the 30-year,” says Huettner. “The difference can be tens of thousands of dollars in additional savings.”
6. Reduce housing costs
Just because a lender is willing to give you a large loan, it doesn’t mean you should take it.
So while it may be tempting to buy a bigger, more lavish house, retirees should really look at their potential health care costs, advises Anthony Martin, CEO and founder of Choice Mutual in Reno, NV.
“If you’re relying on a pension, Social Security benefits, and other retirement accounts for your income, then you want to ensure your mortgage isn’t going to be too expensive,” says Martin. “Narrow your monthly housing costs—which should also include property taxes, interest, and insurance—to 20% to 25% of your income.”
You want to avoid digging too deeply into your nest egg or using a large portion of your retirement fund to pay for a mortgage since it may leave you with little money for unexpected expenses.
By Kathleen Willcox on Realtor.com