The process of getting a mortgage can be a challenging one for applicants of any age. But for older borrowers, those who are no longer drawing a paycheck or are relying on passive income, proving to a lender that they have sufficient income and assets to qualify can be even more daunting.
This issue affects more applicants than you would expect. According to Home Mortgage Disclosure Act data provided to The Wall Street Journal by the Consumer Financial Protection Bureau, 13% of all mortgages originated in 2021 were by people 65 years of age and older. That is over 1.9 million mortgages.
Lenders typically base their mortgage decisions on an applicant’s income, assets, debts and credit score. Discrimination against credit applicants on the basis of age is prohibited by the Equal Credit Opportunity Act. However, while lenders may not consider age per se when qualifying an applicant, they can look at age-related factors such as whether that applicant’s income might drop because they are about to retire.
That is why lenders scrutinize not only the source of a borrower’s income, but the likelihood that it will continue as well.
“Regardless of your work status, there is still a requirement that you be able to support a mortgage, with verified cash flow and income,” said Charlie Nilsen, senior managing director of SVB Private, a private bank based in Santa Clara, Calif.
All types of income, active and passive, are included when qualifying an applicant for a mortgage. But the process of verifying that income may vary. “For example, when an individual receives Social Security benefits, all we have to do is verify that the award was to the individual we’re lending to or that they are the beneficiary of that award,” said Brian Rugg, chief credit officer of loanDepot Inc. “With Social Security retirement income, it’s typically a lifetime guarantee, so there’s no need to validate the continuance of the income.”
For retirees who rely on an investment portfolio to cover living expenses, qualifying for a mortgage is slightly different, experts say, and the methods vary depending on whether that retiree is taking required minimum distributions, withdrawals from retirement accounts that are required by the IRS, or just dipping into a portfolio when he or she needs funds.
If a borrower is taking required minimum distributions from an IRA or 401(k), the income they receive can be used for qualifying as long as the account has sufficient assets for those distributions to continue for three years, according to Bill Banfield, executive vice president of capital markets for Rocket Mortgage in Detroit.
If an applicant is instead withdrawing money from nonretirement accounts when they need cash, the lender can still include that income under the so-called “asset depletion method,” where the eligible assets are divided by the term of the mortgage and the resulting amount is used to calculate the applicant’s monthly income, Mr. Banfield said. Bear in mind, however, that most lenders will only use 70% of the investment portfolio to account for market volatility. So, for example, if a borrower has an investment portfolio worth $1 million and applies for a 30-year mortgage, the lender would consider $700,000 to be eligible assets for qualifying and the monthly income included for qualifying would be $1,944.44 ($700,000/360), Mr. Banfield said.
Here are some things older adults should consider before applying for a mortgage.
Seek out a lender that has experience with older borrowers. A survey released in November 2022 by Zillow Home Loans found that 72% of prospective home buyers had not shopped around, nor had any plans to shop around, for a mortgage that best suits their financial situation. But, working with a lender who has experience with older applicants can mean the difference between approval and rejection. Mr. Rugg’s father, a veteran, has an 800 FICO score and no debt. He called a lending institution he banked with to ask about a cash-out mortgage, and they asked if he was employed. He said no, and they told him they couldn’t help him. Although he had other sources of income, they didn’t ask about it. When he called the lender back to explain that he had other sources of income, they took his application, and he qualified for the mortgage. That is why Melissa Cohn, a regional vice president at William Raveis Mortgage, suggests dealing with a human and not going online to fill out a mortgage application. “There may not be places to put all your income,” she said. “The first line will be base income, then bonus, commissions, dividends and interest. There is no asset-depletion line on a mortgage application. You need to speak to an expert, someone who is experienced and will give you good advice.”
Understand the impact of cosigning for someone else’s loan. If you’ve cosigned for a home or car loan for children or grandchildren, be aware that those loans can affect your credit score. “Any derogatory payments affect the credit score of the retired person,” Mr. Banfield said. “Even if there is no delinquency, it’s another debt reported on your credit report, so even if you have all the money saved up that you want, if your credit score drops below eligible levels, you won’t qualify for a mortgage.”
Consider alternatives for short-term home financing. For short-term needs, such as bridge financing for those selling a home and buying a new one, there are alternatives other than a home mortgage. “They can do an asset-based loan or an investment credit line and borrow against their investment portfolio to pay cash for the new home,” said Michael Silver, a certified financial planner in Boca Raton, Fla. “I have many clients who have done that, but it’s always a shorter-term solution where you have a plan to pay it back because the rate fluctuates monthly.” Mr. Silver said the rates are generally 1.5 percentage points over the 30-day LIBOR or federal funds rates, and adjust monthly.
This article was originally published in The Wall Street Journal on February 9, 2023, and written by Robyn A. Friedman.
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