March 5, 2021

Mortgages: Borrowing in Retirement

While the majority of older homeowners will pay with cash and therefore will not need a mortgage, some may require financing — perhaps because their previous home declined in value, or because they wanted to keep a portion of the money from the sale in income-generating investments.

About a third of the 65-and-older households that owned a home in 2009 had a mortgage, according to the Census Bureau’s American Housing Survey, which also put homeownership in this age group close to 81 percent during the second quarter of this year. By contrast, around 64 percent of people 35 to 44 were homeowners, and only 38 percent of those younger than 35 owned homes, the latest census data found.

Lenders say the mortgage process is the same at any age. If you qualify based on income and credit scores, a lender cannot deny you a loan based on age. That would violate the federal Equal Credit Opportunity Act, which prohibits discrimination based on age, race, gender and other criteria.

“We just had someone who came in at 85 and got a loan — a 30-year loan,” said David Boone, a first vice president of Provident Bank in Jersey City, N. J.

He said the man borrowed under $100,000 and chose a 30-year term to keep the payments low.

Older borrowers should begin the loan process by gathering documentation, Mr. Boone said. If you’re retired, you will need to provide a pension award letter or Social Security award letter, along with income tax returns and statements from other retirement accounts like an Individual Retirement Account or a 401(k) plan. If you’re still working, pay stubs and other documentation from your employer will be needed.

Even if you’re on the verge of retirement, lenders generally will consider only current earnings. But Erika Safran, a financial planner in Manhattan, suggests factoring in retirement income anyway, to help determine whether you will still be able to afford the home down the road.

Borrowers will want to look at their available cash flow now and 5 to 10 years ahead. Ms. Safran cautions against taking too much out of savings for the down payment if the projected cash flow for various expenses is low. Instead, she said, older borrowers should seek a larger mortgage amount, preserve the remaining funds as a cash reserve.

Credit history is important. Besides looking at credit scores, Mr. Boone said, most lenders will want to see at least three credit sources, like utility bills.

And lenders will expect to see a debt-to-income ratio of no more than 40 or 45 percent, said Gary DeTrano, a mortgage broker at Walden Group in Mineola, N.Y. (The ratio measures the amount of gross monthly income that goes to paying off all debts.)

You will need to decide on the length of the mortgage. Consider how long you’re going to live in the home, and whether you want to build up equity, perhaps for your partner or your estate.

“You accumulate equity much more quickly with a 15-year term than a 30-year term,” said Andra Ghent, an assistant professor of real estate at Baruch College.

Many retirees may be drawing down their assets and don’t need to build equity in their home, so they may prefer a 30-year term.

Estimating how long you expect to live there will help determine whether to pay points — each point is 1 percent of the loan amount — to lower the interest rate. Buying down your rate makes more sense, Ms. Ghent said, when you plan to own the house for many years.

This article has been revised to reflect the following correction:

Correction: August 21, 2011

The Mortgages column last Sunday, about borrowing in retirement, described incorrectly the reason given by Erika Safran, a financial planner, for why older borrowers may need to take out larger mortgages. She said they should preserve their cash flow as a cash reserve, not use the money for investments.

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