Dear Sick,
I’m not going to sugarcoat it: Now is an absurdly difficult time to buy a home when you don’t have equity to trade up. Being thrust into the madness of this housing market just as your retirement years are beginning is an especially tough blow.
Lenders can’t discriminate on the basis of age. So the fact that you and your husband are 70 years old shouldn’t preclude you from buying a home.
But the challenge here is twofold.
For starters, retirees are considered riskier borrowers than people who have jobs. If you’re depending on income from retirement accounts, your income can drop substantially if the stock market tanks.
The second problem is one buyers of all ages grapple with. Bidding wars are driving up selling prices above already inflated list prices in many parts of the country. Banks won’t lend you more than the appraised value. That means buyers have to come up with cash not only for a down payment, but to make up the difference between the appraised value and selling price.
Going back to getting a mortgage as a retiree: When you apply for a loan, your Social Security benefits will count as income. You can also count distributions from your retirement accounts as income, but you have to be able to prove that the withdrawals will continue for at least three years after your mortgage begins. Because investments can be volatile, most lenders will only allow you to use 70% of the accounts’ values to qualify.
Another possibility is what’s known as an asset depletion loan. Basically, your lender uses your assets instead of your income to determine how much you can afford. They’ll typically divide your assets by 360, representing 30 years of payments. For investments, the value is also typically capped at 70% of the value.
So if you had a $1 million nest egg, your lender may allow you to use $700,000 of that money to qualify. Dividing $700,000 by 360, they might determine that you have about $1,945 of additional monthly “income.”
As you’re painfully aware, finding affordable housing will be the big challenge, whether you rent or buy. One thing to consider if you’re approved for a mortgage is asking your landlord whether he’d be willing to sell directly to you. This may be a long shot if you’re in a highly competitive area. But it’s worth asking, given that this could be convenient for him.
If buying your current home isn’t possible, you’ll probably need to lower your expectations. Maybe you can’t find a home in your current area, but are there affordable options an hour or two away? Would you be willing to live in a small condo instead of a house?
Expect to grapple with these questions, even if you wind up renting again. Many landlords keep rent hikes manageable for current tenants, then jack up the rent when the tenant moves out. Though I hate to say it, you’ll probably need to increase your housing budget no matter what.
The bright side is that you have six months to prepare. Start talking to lenders about your options now. Also start looking at both rentals and homes for sale now, even though moving day is months away.
Obviously, it can take significant time to find a home in an overheated market. But if you’re buying, sometimes flexibility can help you make a stronger offer. Sometimes sellers will accept a lower offer if the buyer is willing to let them stay put for a few months because they need time to find a new home.
It’s understandable why you want to buy so badly, given the disruption to your retirement plans. But try not to get caught up in the homebuying frenzy. Focus on what you can afford, even if that means downsizing and continuing to rent.
