Many people experience changes as they move into their retirement years. You go on more vacations, spend time with loved ones, and downsize your home. Securing a home loan can be challenging when you’re on a fixed income, but there are safeguards to protect retirees from being denied loans based on their income or age. The Equal Credit Opportunity Act prohibits discrimination based on race, color, religion, national origin, sex, marital status, age, receipt of public assistance, or good faith exercise of any rights under the Consumer Credit Protection Act. Lenders cannot discriminate based on a borrower’s age or working status. Like employed borrowers, you must show a good credit score, a low debt-to-income (DTI) ratio, and enough income to pay the monthly mortgage. Let’s look at these three qualifications as they relate to retired borrowers:
Good credit score. Good credit is required for any mortgage loan, regardless of age or employment status. Lenders look for scores above 620 to qualify; the higher the score, the better the interest rate. Most lenders use the Fair Isaac Corporation (FICO) model for credit scores, which grades borrowers on a 300 to 850-point scale. The higher the number, the less risk to the lender, which may result in a lower interest rate on your loan. To raise your credit score, you should pay bills on time, reduce your debt by keeping credit card balances low or paying them off, and apply for new credit accounts only as needed. Your credit report is available from the three national credit bureaus, Experian, TransUnion, and Equifax. You can request them for free once a year per credit bureau.
Low debt-to-income ratio. DTI stands for debt-to-income ratio, the percentage of your monthly income paying debt. Your lender uses the DTI ratio to determine how much of a risk you are paying back a loan. Expenses you incur that can count toward debt include car payments, mortgage payments, student loans, or anything that requires a regular monthly payment. To figure out your own DTI, add up all your recurring monthly expenses, and divide them by your gross monthly income (the amount you earn each month before taxes and other deductions are taken out). So, if you are on a fixed income, you must ensure your expenses stay relatively fixed and below 50% of your income, which is the maximum eligible DTI for most lenders.
Adequate income. Even though a retiree’s fixed income may not be enough to qualify for a mortgage loan, they can also show significant assets to compensate for the smaller income. Fannie Mae allows borrowers to use assets, like IRAs and 401(k)s, lump retirement account distributions, and proceeds from the sale of a business that are “entirely accessible to the borrower, not subject to a withdrawal penalty, and not be currently used as a source of income” to qualify. Lenders sometimes call qualifying in this manner an asset depletion loan. The assets can be used as income, allowing the lender to evaluate an applicant’s repayment ability versus an employment income source.
If you want more information on how to qualify for a home loan if you’re retired, call the experts at NASB at 855-921-4921, or click here to learn more about asset depletion loans.