New York

Moving somewhere new when you retire isn’t uncommon. But deciding whether to take out a new mortgage to buy a home is a big deal.

Much of your financial life is changing as you transition from a steady paycheck to a mix of fixed and variable income and a new lifestyle. So adding a large debt to the picture isn’t an easy call.

That’s especially true now that mortgage rates hover around 7% and home prices keep rising. “Any time you take on debt, you increase risk in your situation,” said Illinois-based certified financial planner Jim Stork.

More than a third (35%) of homebuyers last year were between the ages of 59 and 98, according to data from the National Association of Realtors. Within that group, a majority financed their purchases.

Whether taking out a new mortgage makes sense for you depends on a lot of factors, including how to prove to a lender that you’re a good credit risk, plus your feelings about the debt and the ongoing cost of maintaining a home.

If you’re concerned that you may be less attractive to a mortgage banker because you’ve hit retirement age, know that it is illegal to discriminate against anyone applying for a mortgage based on their age.

Lenders’ chief focus will be on your ability to repay your mortgage with your various sources of non-paycheck income.

“When you qualify for a mortgage, it’s all based on your income,” said Melissa Cohn, regional vice president at William Raveis Mortgage.

That, and of course any debt you have that will soak up your income, but we’ll get to that in a minute.

The income sources that lenders consider, absent a regular paycheck, include: Social Security benefits, pension or annuity income, spousal benefits, disability payments, interest and dividends and your 401(k) or IRA.

If a portion of your income is not subject to tax, the lender may treat it as worth 25% more. Fannie Mae offers this example: Say 15% of a $1,500 monthly Social Security benefit is tax free. That means $225 of it will not be subject to tax ($1,500 x 15%). And 25% of that amount comes to $56 ($225 x 25%). So that $56 can be added to a person’s qualifying Social Security income amount ($1,500 + $56 = $1,556).

If you want to use your nest egg, different methods can be used to calculate how much income it would provide. There is the asset depletion method in which your eligible assets are divided by your loan term. In the case of a 30-year mortgage, that would be 360 months. If your IRA is worth $700,000, that translates into $1,944 per month ($700,000/360). “You don’t ever have to take the money out — but you can use your assets [to qualify for a mortgage] as if you were going to take the distribution,” Cohn said.

Another option: If you are at least 59-1/2, you can start taking monthly distributions from an IRA without penalty — or a 401(k) if your plan rules permit — and the lender will count that as income so long as you show that you have sufficient funds in the account to keep taking that same monthly distribution for three years. Once you close on your home, Cohn said, you can reduce or stop taking distributions if you choose. That assumes you are not yet in your 70s when the IRS requires you to start taking minimum distributions, said Mark Luscombe, a principal analyst at Wolters, Kluwer Tax & Accounting.

Lenders will also assess your debt-to-income ratio, because no matter how much income you have, the big question is how much of it will be consumed by your debts.

The debt portion is composed of your expected mortgage payment plus any credit card, student loan, car loan or other outstanding debt you may have. Generally speaking, for conventional loans your DTI ratio can be up to 50%, Cohen said. That ratio falls to between 43% and 45% if you’re taking out a jumbo loan, she added. A jumbo loan exceeds the conforming loan limits in the area you want to buy.

But ideally your debt level will fall well below these top limits, both for the lender’s sake and yours.

And, of course, the higher your credit score, the better the interest rate you can get on a mortgage.

Even before seeking a mortgage, get a good grasp on your expected monthly income and expenses in retirement.

Compared to pre-retirement earnings, “Most (new retirees) see a decrease in income,” said certified financial planner Lori Trawinski, director of finance and employment at AARP.

While some expenses may also decline — e.g., work-related costs like commuting — others may increase over time, Trawinski said, like medical costs, property taxes, home insurance and utilities.

Of course, you can downsize and move to a lower-cost area. But if you stay near where you lived during your career, your expenses are likely to rise over time.

Also, Trawinski noted, if you’re married, consider what will happen to your household income when one spouse dies. This will help you assess your future comfort level in carrying a mortgage. “People often fail to plan for the death of a spouse. You can take a big hit to your income when that happens,” she said.

If you do move to a new state or region, weigh renting first. You can get a better sense of the cost of living in the area and decide whether it’s a good fit for you. As Stork put it, “Florida in August is not as fun as Florida in January.”

How much are you really willing to take on? All the usual financial decisions that go into homebuying apply no matter your age. But, in retirement especially, you don’t want to take on more debt than necessary, since the cost of a mortgage is fixed, but the returns on your investments, the housing market and your health needs are variable.

At the very least, Stork said, consider whether you can put enough money down — at least 20% — to avoid having to pay private mortgage insurance.

Beyond that, consider whether you feel comfortable keeping up — and paying for — maintenance on a home. Maintenance might amount to 2% a year of your home’s value, Stork said. That amounts to $10,000 a year on a $500,000 home. Maintenance is essential in preserving the value of your house should you ever decide to sell.

How would your mortgage interest rate compare to a reasonable rate of return on your investments? The decision to get a mortgage was a lot easier for retirees when rates were historically low — roughly 3% — and their nest eggs were earning a lot more. “But at today’s rates it’s a much harder calculation,” Stork said.

This is especially the case if you’re a very conservative investor. “If your CDs are earning 4% and a mortgage would cost you 7%, you will lose money every day on that decision,” Stork explained.

To get the truest reading on what makes financial sense, compare mortgage expenses to your investment returns on an after-tax basis, Stork noted.

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