Can a Retired Person Get a Mortgage?
By Pierre Mouchette | Bits-n-Pieces
Social Security income can be used when applying for a mortgage, but the lender must assess your financial situation for approval. It may be more difficult, but retirees using only income received from Social Security benefits can qualify for a mortgage if the amount is sufficient.
Aside from looking at your credit score and down payment commitment, a lender will need proof of your Social Security income, which you can obtain from the Social Security Administration by requesting a Social Security benefit verification letter.
Mortgage providers look at an applicant’s debt-to-income ratio when determining loan suitability. As the name suggests, a DTI indicates your monthly debts, including housing costs, to your monthly income.
For a conventional mortgage loan, lenders typically require a DTI of 36% to 45% of stable monthly income, depending on credit score. However, according to Fannie Mae, some borrowers may be approved with a DTI of 50%.
How Lenders Evaluate Your Income
Despite earning a typically lower income than wage workers in their prime, Social Security beneficiaries are at a slight advantage in one regard. Lenders look at gross income when qualifying an applicant for a mortgage, and the gross income is based on taxable income. Social Security benefits, up to a certain amount, are not considered taxable by the federal government and may help a senior get approved for a mortgage.
Social Security beneficiaries do not pay federal income tax on their Social Security benefits unless their combined income from all sources is more than $25,000 ($32,000 for married joint filers) per year. That means lenders do not have to subtract federal tax from a beneficiary’s gross income to determine how much after-tax cash they have available to pay their mortgage and other bills.
It may also help older mortgage applicants who earn more than $25,000. Those with a total income of between $25,000 and $34,000 pay income tax on up to 50% of their Social Security benefits, and those who make more than $34,000 pay up to 85%. So, 15% to 100% of a Social Security beneficiary’s Social Security benefit is non-taxable on their federal income tax return and can be “grossed up” by a lender during the mortgage application process.
How To Improve Your Chances of Getting a Mortgage
At any age, the higher your credit score and the more you can put down, the better chance you will have of securing a mortgage at a better rate.
Conventional mortgages typically require a credit score of 620 and a down payment of at least 5% (3% for special programs for borrowers with modest income). Government-backed Federal Housing Administration loans typically require a credit score of 580 and 3.5% down or a 500-579 score and 10% down.
Any supplemental income, such as investment or retirement accounts, will improve your chance of having your mortgage application approved.