New American Funding Blog

FHA and Retirement

By Chelsea   |  August 22, 2014

Congratulations, you have finally reached retirement! Time to relax and spend some time with your family, travel, and do activities that you enjoy rather than spending all of your time sitting behind a desk from 9-5. You’ve been putting your hard earned money into your 401(k) account for 40 some years so that your retirement can be enjoyable, not stressful because you aren’t sure if your social security benefits and retirement pay will cover moving to a new home or refinancing your current one. Keep reading to learn more about why FHA might be a good option for you!

Why this matters?

Most people don’t consider how often and important it is for seniors to have the freedom to move to a new home. Whether the reason is to be closer to family, to finally relocate to your dream city, or simply just to purchase a smaller home that is easier to take care of, seniors actually move quite frequently. In regards to refinancing, if you chose to stay in your current home after retiring and don’t plan on moving anymore, taking cash-out can be a great way to take advantage of gaining additional funding towards traveling and living a stress-free life. However, when applying for a loan, your lender will need to see a job history to prove that there is a steady income that will allow for the mortgage to be paid and this is where many retired borrowers feel deterred in seeking out a new loan.

Debt to Income

When calculating debt to income ratio, the lender must follow the specific guidelines set up by the U.S. Department of Housing and Urban Development. When it comes to retirement pay, including pension and 401 (k) funds, the lender is required to follow up with the borrower’s former employer to verify how much and for how long the retirement pay will continue. Social Security incomes must also be verified by the Social Security Administration, and if these benefits are scheduled to expire within the first three years of the loan, this income must only be considered as a compensation factor, thus disqualifying this borrower from obtaining a loan, unless they can prove that they are getting an income from either a part time job or another qualifying source.

Equal Credit Opportunity Act

But there is a light at the end of the tunnel. As long as your 401 (k), pension, or Social Security benefits are scheduled to continue for over three years, getting an FHA loan can be a fairly straight forward process. In fact, your age or retirement status should not even be a factor in getting a loan as long as your finances fit into the FHA guidelines. The Equal Credit Opportunity Act has made it illegal for a lender to discriminate against age for any qualified borrower.

Where FHA Comes in

The benefits of and FHA loan can be great for seniors because generally they offer lower interest rates, lower down payments, approve lower credit scores, and sometimes cover closing costs. Fannie Maw and Freddie Mac both offer retirement fund annuitization procedures that require lenders to divide 70% of the value of a borrower’s fund over 360 or 180 months of the loan’s terms. This could significantly boost the amount of income in the senior’s 401 (k) account. Not all mortgage companies offer this product, so many sure you ask your loan officer if this is something available to you. The AARP website has great information about all of the special programs for seniors, click here for more info.

If you know anyone who has recently entered into retirement and is considering getting a loan, please feel free to pass this along to them!

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