Because lenders use borrowers’ income to qualify them for a mortgage or refinance, I often get questions about what this means for retirees who may have smaller incomes than when they were still working. The short answer is that you can still qualify for a mortgage once you’re retired, but the mortgage amount may be smaller. In fact, I am currently working on refinances for two retired clients.
Here’s how mortgages typically work for retirees.
- Documenting Income: Lenders want to see many of the same income documents from retired borrowers than they’d request from working borrowers, such as a Notice of Assessment (or NOA), T4As or (if those are nowhere to be found) a few months’ worth of bank statements showing monthly income. If a retiree has investment income, they could also use their T5 to demonstrate that income to the lender. Pensions and old age security are also used as income to help retirees qualify.
- Rental Income: Some retirees have income from rental suites, and lenders will sometimes count this money as income if it’s a separate, self-contained suite (some lenders will require that it’s a legal suite). Generally, these lenders add 50 per cent of the net rent back to the borrower’s income using a valid lease or estimated rent from an appraiser. If you need room and board income to qualify for a mortgage, then an alternative lender or B lender might be another option. However, keep in mind that these lenders will often charge a higher interest rate and sometimes fees as well.
- Equity: In the refinances I am currently working on, both clients should qualify for the refinance because they have at least 25 to 40 per cent equity in their homes (so it’s not considered a high-ratio mortgage) and their remaining mortgage balances are relatively low. One client has an outstanding balance of $84,000, while the other’s balance is around $240,000 (some lenders will have a minimum balance of $50,000-100,000). Older clients have typically built up significant equity over time. Lenders don’t want retirees to take out all of their equity so if they are refinancing to consolidate some debt, they would need to show that they are responsible with credit by maintaining good credit and keeping their debt ratios in line. There is also another product for retirees (CHIP) which is a reverse mortgage and focuses more on equity than your typical refinance.
The bottom line is that lenders use income for borrowers of all ages, whether you’re self-employed and paying yourself a salary from retained earnings, working for an employer or living off investment income as a retiree. Having good credit and keeping income documentation will help you qualify for a mortgage at any age.