How does a mortgage approval work if you're retiring soon?

Paying off your mortgage before retirement used to be a lot more common in days gone by, but that’s no longer the case today. According to data from the Urban Institute, only 11% of homeowners aged 75 or older still had a mortgage in 1998, compared to 30% in 2022.

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People carry mortgages into retirement for all sorts of reasons. Houses have gotten more expensive over time, after all, while wages haven’t exactly kept up. You might also need a new mortgage if you’ll be relocating to live closer to family, for example, or downsizing to a more manageable home for your golden years. 

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Getting approved for a mortgage if you’re retiring soon — and managing the debt well — can be trickier than if you’re in your 30s, but with the right foresight, it’s possible. We’ll show you what to consider. 

How does a mortgage approval work if you're retiring soon?

The Equal Credit Opportunity Act prohibits lenders from taking certain factors into account — such as your age — when you apply for a mortgage. Provided that you can qualify for a mortgage based on your income, finances, and other allowable details, it doesn’t matter if you’re 18 or 81. Lenders will evaluate your application in exactly the same way. 

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Many younger and older people don’t have sufficient financial qualifications to get approved for a mortgage, however, and lenders are allowed to decline applications on this basis. This is one of the biggest challenges that retirees face when trying to get a mortgage after retirement, in fact, since they may not match a typical applicant’s profile. 

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Let’s take a step back and look at how retirees may stack up against general mortgage qualification requirements. 

Mortgage basics

Any applicant will be judged on the same set of factors when it comes to getting approved for a mortgage. Here are those requirements:

• Monthly income: Sufficient to make the mortgage payments for the house you’re buying. 
• Income consistency: Stable sources of income are viewed more favorably, such as Social Security, pensions, or annuities, compared to money from part-time side hustles. 
• Debt-to-income ratio: No more than 50% of your monthly income should be going toward your minimum debt payments (ideally, less than 36%). 
• Term length: Mortgages are typically available in 15- or 30-year term lengths. Make sure you’re able to keep paying for that long or have another plan in place.
• Credit score: You’ll need a score of 620 or higher. Older adults generally have a high credit score compared to younger generations. 
• Down payment: Most lenders require 20% down on a mortgage. Older adults are typically able to make a larger down payment, which also reduces the loan size.
• Assets and savings: Having more money saved in investments and other assets can help make a stronger case with wary lenders that you’ll be able to repay the debt. 

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If you haven’t yet retired, it can be beneficial to apply for a mortgage before you stop working. That way, you still have traditional employment income that you can show to a lender, which can make it easier to get approved. 

How lenders evaluate retirement income

Retirees don’t typically have a W-2 they can hand over as proof of income to a lender, unlike those who are still working. Instead, you may need to use alternative ways to document your income, such as using recent tax returns, account statements, and/or letters from benefit providers confirming your income. 

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Most retirees paying mortgages in retirement use funds from various sources, each of which has a paper trail attached to it that you can show a lender, such as:

• Pension payments
• Social Security benefits
• Annuity, life insurance, or disability insurance payments
• Passive income streams such as book royalties or rental real estate income
• Required minimum distributions (RMDs) from retirement accounts like IRAs and 401(k)s

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Keep in mind that you’ll need to have a plan to pay your mortgage for as long as you have it — which, with 30-year terms being popular choices, is a long time for someone in retirement. The more you can supplement your income with guaranteed income streams such as Social Security or pension payments (as opposed to retirement savings, which can dry up), the more secure you can be that you’ll be able to afford your mortgage no matter what happens.  

Mortgage options for retirees

Choosing the right type of home loan is key to getting approved for a mortgage before retiring. In addition, you can set yourself up for success by choosing a mortgage type that better matches your needs in retirement, such as having a predictable payment or extra support options. 

• Traditional fixed-rate mortgages: These mortgages are easier to repay on a fixed income because your monthly payment won’t change. 
• Adjustable-rate mortgages (ARMs): Interest rates may be lower initially, but they can change over time, causing shifts in your payment. 
• Asset-depletion mortgages: If you have lots of assets but not enough income, some lenders will allow you to use some or all of your assets as qualifying income. 
• FHA: These mortgages come with extra fees but allow people with lower credit scores and down payment savings to qualify. 
• USDA: People living outside of major metropolitan areas can qualify with less income than traditional applicants. 
• VA: Veterans and their surviving spouses can qualify for no-down-payment home loans that offer many other special features to make repayment easier. 

Alternative options

If applying for a brand new mortgage isn’t in the cards for you — but you have a home now — it’s possible to find workarounds. 

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You can borrow against the equity you already have in your current home for whatever you want, such as home improvements to help you age in place or even to buy a second property. Some homeowners use this approach to move into a new home, for example, while renting out their old home for extra retirement income. 

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Here are popular tools that many homeowners use to achieve these goals:

• Second mortgages: Home equity loans and lines of credit (HELOCs) allow you to borrow money while keeping your existing mortgage (if any) in place. Retirees often have more home equity available to them, making this a popular option. 
• Reverse mortgages: People aged 62 and older can take out a lump sum, a line of credit, or set up steady monthly payments, without having to make any payments of their own while they live in the home.
• Home equity investment (HEI): These financing options offer a lump sum of funds without having to make any monthly payments. There are no income requirements, making this a particularly compelling option for retirees. 
• Selling and downsizing to a smaller home: Many retirees simply opt to sell their current home and use the funds to buy a smaller home in cash. Living in a smaller home can help in retirement because it costs less and is easier to manage. 

Final thoughts

It’s possible to get approved for a mortgage if you’re retiring soon with careful planning. Experts strongly recommend working with a fiduciary-based financial advisor if you go this route, however, in order to ensure you’ve taken everything into account. Retirement planning, in general, is a complex topic without adding a mortgage into the mix, after all. 

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Your expenses will likely change dramatically when you enter retirement, for example, and they’ll keep shifting as your healthcare and support needs change over time. That’s especially true if you need to outsource homeownership tasks you once did yourself, such as routine maintenance and lawn care. 

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Studies show that 40% of retirees who carry a mortgage in retirement are too heavily cost-burdened compared to just 24% of younger homeowners. You can ensure you land among the 60% of retirees who don’t need to rely on credit cards and other consumer debt with the right strategic planning.

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