Are you 65 or older and still making mortgage payments? You’re not alone. Recent statistics from LendingTree show that roughly 10 million homeowners 65-plus are still paying on their mortgages – about 1 older homeowner in five. As nice as it would be to have a paid-off home in retirement, that goal remains elusive for plenty of aging homeowners.

However, that statistic assumes that, if you’re still making payments at age 65 or older, you already had that mortgage when you retired. But what if you’re already retired and you’re looking to take out a mortgage to buy that condo or retirement dream house, or even to get a home equity line of credit (a HELOC)? You might assume that your excellent credit rating and solid retirement assets would make the approval process a snap.

If that’s your assumption, you could well be in for an unpleasant surprise, as we learned from this recent column by financial reporter Liz Weston. (Weston writes for NerdWallet but we ran across this column in the Seattle Times.) She reports on a well-to-do retired couple who recently found that qualifying for a HELOC to fix up their St. Louis-area home was harder than they thought. Our first reaction was, if these guys can’t qualify, who can? Our second take-away: as Weston suggests, if you hope to get a mortgage in retirement, it might be wise to do all you can to obtain it before you stop getting a regular paycheck.

Turned Down Twice, Despite Excellent Financials 

“Retired engineers Kelly and Derek Barkey assumed they would be approved when they applied for a $50,000 home equity line of credit two years ago to fix up their new house,” Weston writes. The couple, now 56 and 59, had sold their Southern California home and paid cash for a St. Louis home worth $850,000. On paper they looked like a shoo-in for the loan, with $3.5 million in combined retirement and brokerage accounts. Their FICO scores were excellent.

“They were surprised when a national bank turned them down,” says Weston. “They tried a local credit union, which also rejected them.”  Kelly Barkey told Weston with a touch of irony, “We haven’t been turned down for credit since about 1987,” back when she was still in college.

Why Are Home Loans Harder to Get in Retirement?

The first impulse might be to accuse the lenders of age discrimination, but the issue is actually more straightforward than hidden bias. “The federal Equal Credit Opportunity Act prohibits lenders from discriminating against applicants based on age,” says Weston, “but that doesn’t mean getting a home loan in retirement will be easy even for those with good credit, little debt and plenty of savings, financial planners say.”

So, what’s the hold-up? Weston spoke with the AARP’s Lori Trawinski, who told Weston that the issue is often demonstrating that you have enough steady income to repay the loan. Proving uninterrupted income is sometimes tougher for retirees than for those actively working.

Proving you get a paycheck is simple for those employed. “Working people can use W-2 forms and pay stubs to prove they have sufficient income,” says Weston. “Lenders can verify incomes through IRS transcripts, by calling an employer or using massive paycheck databases such as The Work Number (explained in this 2022 NerdWallet column). Lenders typically want to see two years’ worth of steady income, but working borrowers aren’t required to prove that their incomes will continue at the same rate.”

The rules are more complicated for retirees, says AARP’s Trawinski. “In addition to proving they have enough income to pay the loan, retired people often must prove that the money will continue for at least three years, she says.”

Mortgage Lenders See Two Types of Retirement Income

The Barkeys, as Weston explains, have plenty of income, at least on paper – a combined $70,000 annually from their taxable brokerage account plus consulting income.  That’s “more than enough to support the payments on a $50,000 home equity line,” Weston observes. “Yet they were told their applications had been rejected because of ‘inadequate income.’”  AARP’s Trawinski blames automated underwriting software for the failure to properly account for the couple’s cash flow.

The challenge, according to the article, is that lenders see two types of retirement income. “Mortgage lenders typically divide retiree income into two categories: income with a potential expiration date and income without,” Weston writes. “Pension payments and Social Security retirement benefits based on an applicant’s work record don’t have an expiration date because the income continues for life. By contrast, retirement and investment accounts often are viewed as having an expiration date because the accounts can be depleted over time, so borrowers must prove the income will continue for a minimum of three years.”

Weston goes into a bit more detail than we have space for to explain how lenders might consider the value of retirement accounts. But in the case of the Barkeys, their young age worked against them: when they originally applied for the HELOC, both were under 59 ½. That meant they couldn’t tap their retirement accounts without a costly penalty. In other words, the $3 million in those accounts could be effectively ignored by mortgage underwriters.

What’s the Answer to Home Loan Approved for Retirees?

One planner with whom Weston spoke, Kayla Johnson of Wilmington, North Carolina, said that it “takes a lot of financial gymnastics” to get mortgages and HELOCS approved for retirees without sufficient steady income.

“[Johnson] recommends people apply for home loans while they’re still working, if possible,” Weston writes. “It’s simplest to secure any loan you may need before retirement.”

But she has good advice for current retirees. “People who need home loans and are already retired should consider talking to a loan officer about their situations before submitting an application and risking damage to their credit scores,” Weston advises. “Such a conversation can help potential applicants get a better feel for how the lender will view their application and how many hurdles lie ahead.”

Remember, Weston reminds us, “Not all lenders are equally skilled at dealing with retired clients, so you may need to talk to more than one lender to find the right fit. And if you’re turned down, don’t consider that the last word.”

That’s the tack the Barkeys took, and it paid off. They reached out to the president of the credit union to find out why they had been rejected. “Soon afterward,” says Weston, “they got a call from the loan department manager admitting the credit union had ‘overlooked some things.’”  Within a day, says Kelly Barkey, the HELOC was approved.

Breaking News: Rajiv’s New Book is Here!

We have big news! The long-awaited book by Rajiv Nagaich, called Your Retirement: Dream or Disaster, has been released and is now available to the public.  As a friend of AgingOptions, we know you’ll want to get your copy and spread the word.

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Through stories, examples, and personal insights, Rajiv takes us along on his journey of expanding awareness about a problem that few are willing to talk about, yet it’s one that results in millions of Americans sleepwalking their way into their worst nightmares about aging. Rajiv lays bare the shortcomings of traditional retirement planning advice, exposes the biases many professionals have about what is best for older adults, and much more.

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(originally reported at www.seattletimes.com)