Can You Buy A Home On Retirement Income?

When reviewing mortgage applications, the top priority for lenders is to make sure the borrower will be able to keep up with the monthly payments. Most people prove this by providing a W-2 or a pay stub. But what happens if you're retired and no longer receiving a regular paycheck? As long as you can prove you have enough retirement income, you could still qualify. However, it depends on the type of income you have coming in, how long you'll be receiving it, and a variety of other factors that determine whether you're a good candidate to receive a loan.

If you're a retiree, one of the main things you need to know about getting a mortgage is what type of income streams lenders take into account and how they value each. Social security, pensions, annuities, spousal benefits, investment income, and retirement accounts are all forms of income that will be considered. Income from social security, pensions, and investments will all be treated as regular income. Annuities, spousal or survivor benefits, or retirement accounts such as 401(k)s will also count as income — but you will need to show that you will continue to receive that income for a minimum of three years. If you have retirement accounts that you have not yet begun to take withdrawals from, a lender can estimate the potential income stream.

While your retirement income streams are vital pieces of the puzzle, they're not the only factors lenders consider. How much debt you're carrying in relation to your retirement income will also influence the decision. Typically, your debt-to-income (DTI) ratio needs to be less than 50% to be seen as a good candidate for a conventional home loan. 

Lenders also weigh your credit score. There isn't exactly an ideal credit score to buy a house, but for conventional loans, most lenders require a minimum score of 620. For jumbo loans, the number is higher, typically above 700. While being retired doesn't directly impact your DTI or credit score — it is not reported to the credit agencies — the reduction in income that often accompanies retirement can cause these numbers to change. 

If you're thinking about applying for a mortgage but aren't sure your retirement income is enough to cover the payments, start by using a mortgage calculator. This will give you an idea of how much you can afford based on your financials, current interest rates, and the size of your down payment. You should also consider applying for a pre-approval from a lender, as this will let you know whether you will qualify for a mortgage and for how much. Before you do so, make sure you have proof of your income readily available.